(UNTITLED)

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP97-00771R000707210001-5
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 36
• Document Creation Date: January 12, 2017
• Document Release Date: October 4, 2010
• Sequence Number: 1
• Publication Date: October 12, 1984
• Content Type: REPORT

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Directorate of
Intelligence
Weekly
International
Economic & Energy
DI IEEW 84-041
12 October 1984
Copy 6 9 4
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International
Economic & Energy
Weekly
iii Synopsis
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Perspective-Third World: Problems in Resuming Economic Growth 25X1
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Energy
International Finance
Global and Regional Developments
National Developments
11 Egypt: How Much Reform? 25X1
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15 Mozambique: Reeling From Economic Blows 25X1
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19 Debtor LDC Import Cuts: A Major Factor in Global Trade Decline 25X1
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23 Zimbabwe's Military: The Impact of Economic Austerity 25X1
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29 Smaller LDC Debtors: Economic Plight and US Interests
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Comments and queries regarding this publication are welcome. They may be
directed to Directorate of Intelligence 25X1
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International
Economic & Energy
Synopsis
Weekly
1 Perspective-Third World: Problems in Resuming Economic Growth) 25X1
The recent IMF/World Bank annual meetings underscored resumption of
Third World economic growth as the next key issue. The LDCs, however, face
some formidable barriers.
11 Egypt: How Much Reform?
President Mubarak and his ministers fear that drastic changes in the "social
contract" will cause widespread popular opposition reminiscent of the 1977
bread riots. Additional action by the government on energy prices, food
subsidies, and exchange rates will, therefore, be slow and deliberate.
The Mozambican economic situation is among the worst in Sub-Saharan
Africa, with economic activity almost in continuous decline since the country
became independent in 1975. Mozambique's problems are so deep seated that
we see scant prospect that it can regain preindependence levels of output by
the end of the decade.
19 Debtor LDC Import Cuts: A Major Factor in Global Trade Decline
Import reductions by 12 key LDC debtors in the past two years have sharply
depressed the export earnings of both developed countries and all LDCs, with
industrialized countries bearing the brunt of export declines. Although first-
half 1984 data indicate the decline in debtor LDC imports is bottoming out,
we do not expect a return to rapid import growth in the near future, which will
continue to retard world export growth.
23 Zimbabwe's Military: The Impact of Economic Austerity
Despite the foreign exchange crunch and significant cuts in the defense
budget, the Zimbabwe Defense Force continues its modernization program.
Although we expect the armed forces will have to reduce, spread out, or forgo
foreign procurement, defense expenditures in fiscal year 1985 probably will
exceed allocations and increase friction within the government and hinder
negotiations between Harare and the IMF.
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29 Smaller LDC Debtors: Economic Plight and US Interests
Although Mexico, Brazil, and Argentina have been the focus of discussions on
LDC debt, a number of smaller LDCs with equally severe economic difficul-
ties have received considerably less attention. US interests in these countries
go beyond the international financial system.
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Secret
International
Economic & Energy
Weekly
Perspective Third World: Problems in Resuming Economic Growth
The recent IMF/World Bank annual meetings underscored resumption of
Third World economic growth as the next key issue. The LDCs, however, face
some formidable barriers. First, international economic conditions beyond
their control have a major impact on their progress. Second, the LDCs' own
economic policies are constrained by domestic and political-social factors that
are likely to hamper performance
Despite recent improvements in the international economy, a number of
external factors could pose constraints to LDC growth:
The pace of industrial-country growth, which has provided a strong boost
this year, seems certain to slow in 1985. Some observers are even warning of
a possible recession.
Increasing protectionism in industrial countries also threatens LDC exports,
particularly for such key goods as textiles, shoes, steel, and agricultural
products.
Weak commodity prices (for example, copper, sugar, precious metals) will
hold down developing country export earnings. High interest costs on
inventories, price cuts by US producers to counter the strong dollar,
substitute technologies, and expected bumper crops in agricultural commod-
ities are maintaining downward pressure on prices. `-
The flow of external capital from official sources, commercial lenders, and
private investors seems almost certain to remain below the pace that
buttressed LDC growth in the late 1970s.
A slack labor market for foreign workers will also tend to hold back LDC
growth in those countries-for example, Pakistan, Morocco, Egypt, and the
Philippines-that depend heavily on remittances from overseas workers.
Any increase in oil prices later in the decade would hit just as restructured
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Along with the international trends, the success of developing countries'
economic growth efforts will rest heavily on these countries' domestic policies
and economic management. A number of key policy shifts will be necessary,
including: stimulating economic efficiency, implementing major price reforms,
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promoting a stable investment climate, increasing attention to agriculture, and
instituting realistic exchange-rate regimes. Adoption of efficient and produc-
tive economic policies is also essential to restoring investor confidence.
In many countries, political-social factors may give economic policy makers
only limited room to maneuver. IMF austerity programs may provoke dissent,
causing governments to water down reforms. In addition, uneven distribution
of growth benefits could contribute to disaffection. Population pressures are
also becoming significant in many debtor countries-for example, Mexico, the
Philippines, Egypt, and Morocco-and could be a serious drag on growth.
Insurgencies and military actions, moreover, are causing substantial drains on
resources and growth efforts in countries such as Peru, the Philippines, and
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British Oil
and Gas Production
Forecast
::]United Kingdom Offshore Operators Association-the
association of oil companies involved in North Sea operations-predicts that a
new development boom could slow the decline in output expected after 1985
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and keep Britain self-sufficient in oil into the next century.
Britain's oil output in the year 2000 could be as much as 1.4
barrels of oil and 2.8 trillion cubic meters of gas.
million barrels a day-slightly more than half the current record production
level of 2.6 million barrels a day, while potential gas production is put at 55
billion cubic meters annually, up from current output of about 43 bcm. This
forecast is optimistic, however, and hinges on the development of 96 fields-
some bypassed earlier as uneconomical-containing an estimated 4.1 billion
Sweden Likely Swedegas, Sweden's state natural gas supplier, has concluded that the
To Reject Soviet proposed project to deliver 1 billion cubic meters of Soviet gas to Sweden via
Gas Offer Finland by 1988 is not economically feasible. The report states that the costs
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of the pipeline across the Gulf of Bothnia and the Swedish gas distribution net-
work would exceed $870 million, and would not be economical based on
present gas price assumptions. Swedegas also noted the reluctance of Swedish
industrial customers to become dependent on the Soviet Union as sole supplier.
As an alternative, Swedegas recommended extension of the existing pipeline
north from Denmark to serve central Sweden. The Swedish Government is
likely to present these conclusions at the next meeting of the Swedish-Soviet
Mixed Commission.
Peru Jeopardizes
Its Credit Rating
Peru's refusal to meet interest payments on its debt will jeopardize foreign
financial support for the remaining nine months of President Belaunde's term.
Central Bank officials recently indicated that they do not intend to draw on
Peru's $1 billion in foreign exchange reserves for debt payments until foreign
bankers release the final $100 million installment of an embargoed loan.
According to the US Embassy, Lima now owes $100 million in payments.(-
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Lima's pressure tactic is likely to backfire. The unpaid interest
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will complicate reconciliation with the
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sentiment.
IMF and make foreign bankers more reluctant to release the $100 million
loan, renew trade credit, and refinance maturing debt. Some banks have
lowered the status of Peruvian loans and have stopped recording the accrual of
interest on them, according to the Embassy. Moreover, the $2.5 billion
refinancing plan for this year, originally scheduled to be signed on 31 August,
has been postponed until at least 10 October. If cash problems intensify,
Belaunde might suspend talks with bankers. As a last resort, he could also de-
clare a moratorium on foreign debt payments in hopes of rallying nationalist
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Nigeria Meets Official US Embassy Paris reports that Lagos-after dragging its feet since the sharp
Creditors Halfway downturn in oil exports in 1982-has offered to begin paying interest on its $2-
3 billion in officially guaranteed short-term debt to restore normal commercial
financing and trade relations. Nigeria has volunteered to make payments at
least equivalent to interest arrearages accrued since January 1984 at a rate of
1 percentage point above LIBOR. Paris Club members, while congratulating
Lagos for making a gesture in the right direction, have firmly stressed the need
for an early IMF agreement and official debt rescheduling before official
export cover can be restored. We believe that Nigeria's growing inability to
meet minimum import needs-deliveries in the first six months of 1984
reportedly dropped about 30 percent from the already depressed level of first
half 1983-has spurred the Buhari regime to seek another stopgap solution to
its debt problems. In our view, however, the regime does not have the will or
the popular support to agree to a rigorous IMF agreement that would include a
devaluation.
Global and Regional Developments
EC Budget Settlement The agreement last week by EC foreign ministers on a supplementary budget
for the rest of the year provides almost $750 million in emergency revenues-
interest-free loans from member states to be repaid when new Community tax
measures become effective in 1986. The plan is contingent on the EC Council's
final approval of new regulations to curb agricultural spending. The 1985
budget continues to provide expensive agricultural price supports and will
almost certainly cause further cost overruns. These will require special steps
again next year. EC attempts to control farm spending are unlikely to prove ef-
fective, and the Community probably will repeat its cycle of budgetary
problems in 1986 and 1987.
National Developments
Rome Submits 1985 Italy's five-party coalition government recently submitted to Parliament a
Budget
relax the government's key spending-control measure.
budget for 1985 that aims to hold the state-sector deficit to $51 billion. This
amount would equal 14.3 percent of GDP, a reduction of 1.4 percentage points
from the 1984 figure. The government is counting heavily on health-spending
cuts and a 7-percent limit on nominal wage increases for government
employees to hold the rise in current spending, excluding debt service, to 7 per-
cent in nominal terms and no increase in real terms. In addition, Rome is ex-
pecting a reform of the value-added tax system and a tax-amnesty proposal to
boost revenues by an estimated $8 billion. The Christian Democrats already
are reacting to criticism from small businesses by calling for modifications in
the Republican-proposed tax-reform measurel. Trade unions, meanwhile, are
balking at government attempts to hold real wages constant and could seek to
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Dutch Cabinet Continuing an austerity policy begun in 1983, the Christian Democratic-Li-
Presents Budget
France Boosts Research
and Development
Spending
Spanish. Social
Pact` Announced
111
percent in 1984 to 9.7 percent in 1985.
beral coalition Cabinet has approved a 1985 budget that contains harsh
spending cuts in public-sector and social programs, a reduction in social
security contributions, and minimal personal tax relief. While approving the
spending cuts, Dutch employers were angered by the decision to cancel the
previously promised reduction of corporate taxes, claiming that the cut in
social security contributions by itself will not be sufficient to boost employ-
ment. Unions, whose members will bear the brunt of the social-spending cuts,
accuse the government of playing one social group against the other. Despite
these complaints, we believe the budget will accomplish Prime Minister
Lubbers' goal of reducing the share of the deficit in national income from 10.5
Minister, Fabius, attaches to research and development.
Recently announced increases in expenditures will maintain the French civil
research and development budget as "an island of prosperity in an ocean of
rigor," according to Technology Minister Curien. The $4 billion budgeted for
1985 represents a real increase of 10 percent over the previous year. Including
military research, total R&D spending will equal about 2.2 percent of GNP,
up from 1.8 percent in 1980. Part of these outlays will fund an additional 536
research positions at a time when the total government payroll is being cut by
about 5,500. The increases reflect the importance that the new Prime
UGT believes threaten job security.
The Gonzalez government has successfully brokered an agreement covering
wage guidelines, labor market regulations, and job programs between business
and the Socialist UGT labor union. For 1985, wages are set to rise 5.5 to 7.5
percent. This would mean a fall in real wages of up to 1.4 percent if inflation
stays within the 7-percent target. The wage band for 1986 is still under
discussion. In return for worker concessions, the government has committed
itself to provide funds for job training and other programs. Business leaders
won a reduction in employers' social security contributions, but failed to
persuade the Socialists to make layoffs easier and cheaper. A tripartite
commission will study dismissal laws in the EC and present a report next year.
The government, however, is reluctant to press too hard for reforms that the
Portugal's Performance Preliminary figures indicate that Portugal is not complying with IMF ceilings
Under IMF Program for domestic credit growth and probably cannot meet the Fund's yearend
inflation target. The IMF program calls for Lisbon to cut the growth of
domestic credit to public-sector enterprises from 40 percent in 1983 to 23
percent this year; state firms' domestic borrowing was up by about 42 percent
in July compared with.the same month last year. Similarly, government
domestic borrowing grew by 21 percent, versus the Fund's yearend 16.9-
percent limit. We estimate Lisbon's failure to rein in public-sector borrowing
pushed it about 17 percent above the Fund's ceiling for 31 July and threatens
to prevent compliance with the remaining limits this year. Despite falling
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percent inflation target out of reach.
domestic demand, inflation is still running at about 31 percent. Price hikes on
government-subsidized goods this month probably will put the Fund's 23-
Lisbon should easily meet the targets for the current account deficit and
foreign debt. Reflecting the pinch of austerity measures, imports fell $490
million during the first half, while exports rose $240 million. Additional
improvements in the trade account should allow Lisbon to trim last year's $1.7
billion current account deficit to $800 million or less, well below the Fund's
$1.25 billion target. With foreign debt rising $600 million to $15 billion during
the first half of 1984, Lisbon should also stay within the IMF's $16 billion lim-
it.
British Bank Rescue To avert a major disruption to world gold markets, the Bank of England last
week acquired Johnson Matthey Bankers (JMB) in the biggest bank rescue
since the British banking crisis 10 years ago. With only $2.5 billion in assets,
JMB-whose parent company is one of the world's biggest gold-bullion
dealers-probably posed a comparatively small danger to the world financial
system.
created out of banks and entities with interests very remote to banking.
Financial analysts have criticized the Bank of England for its unprecedented
protection of a nonbanking market, and some fear that the rescue may be
taken as a precedent that leads other bankers to take less care in their
operations. Critics also are likely to point out that this move is in conflict with
Thatcher's plans to sell state-owned industries to the public. The ongoing
deregulation in London's financial markets probably will complicate. banking.
supervision even more in the future as other conglomerates like JMB are being'
NTT Attempting To According to the press, the Nippon Telegraph and Telephone Public Corpora-
Corner Telecommuni- tion (NTT) is speeding up its plans by more than one year and will introduce a
cations Market digital information system to link the Tokyo-Osaka corridor in January 1986.
NTT will be able to offer high-speed facsimile and data services at very low
rates because of the lower unit costs of digital communications. NTT, now a
government-regulated monopoly, is trying to secure Japan's most important
corporate telecommunications market before being compelled to face market
forces if the planned return of the firm to the private sector begins this spring.
The decision to hasten the system was no doubt spurred by the announcement
of the formation of a new telecommunications company that would have
focused on the same market.
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Israel's Stopgap Unable to get Cabinet or labor backing for a comprehensive economic
Economic Measures "recovery" package, the Israeli Government is falling back on stopgap
measures. According to press reports, the Finance Ministry has conceded that
the $1 billion budget cut approved in principle by the Cabinet several weeks
ago will amount to only $500 million because the fiscal year is already half
over. Most of the ageed "cuts" are actually additional fees for government
services. We believe that the six-month ban on the import of 50 luxury items
and tightened foreign-currency controls were imposed in a tactical effort to
impress US officials before Prime Minister Peres's visit to Washington.
mestic producers of banned imports will be difficult to enforce.
problems underlying Israel's economic woes-particularly the indexation of
wages to inflation and ineffective monetary policies-and, thus, will have only
a marginal impact. Moreover, the price controls that have been imposed on do-
In our view, the steps taken so far do not tackle the structural
Less Developed Countries
Foreign Investment Direct foreign investment in Mexico reached only $29 million during the first
in Mexico Plunges
announced in August.
six months of 1984, more than a 90-percent drop from the already depressed
level of the same period in 1983, according to figures just released by the Bank
of Mexico. Even though the government has loosened some investment
restricitons and claims to be dealing more flexibly with foreign investors, new
industrial reorganization codes have substantially increased regulation of
foreign-controlled industries. The most controversial of these, the pharmaceu-
tical decree published this February, boosts state involvement in such basic
business decisions as purchases of raw materials, pricing, labeling, and
packaging. Moreover, foreign investment was given a small and largely
undefined role in Mexico's latest industrial and trade development plan
fear of growing state control is the principal cause
poor investment climate will discourage most foreign firms.
of the sharp falloff. Continued weak consumer demand and project-eroding
price controls also discourage new investment. While some rebound in
investment during the next year or so is likely by well-established firms, the
Panama Refurbishes To counter accusations of heavy involvement by Panamanian banks in drug
Its Financial Image
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12 October 1984
money laundering, the Panamanian Banking Association has adopted a code of
conduct that discourages acceptance of unexplained cash deposits in excess of
$100,000 and establishment of named or numbered accounts by poorly
identified clients. Since the code has no legal status, its impact will depend
solely on the degree of moral suasion exercised by the banking community
itself. Its stipulations, even if enforced by the banks, will be weakest for
established drug-money flows, most of which are handled by local agents well
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known to the banking establishments with which they deal. Moreover, the
US-British accord on drug-money investigations in the Caymans may shift
even more illicit receipts to Panama.
Ecuador Liberalizes The Febres-Cordero government has introduced a floating exchange rate to
Foreign Trade improve the trade balance and gain favor with the IMF and bank creditors. In
August, the administration replaced its crawling peg-exchange single-rate
system with a dualsystem of a freely floating and a fixed official rate. The free
market rate has fallen by 75 percent since the new system was introduced. All
foreign trade except petroleum exports and imports of essentials will be paid
for at the free-market rates. In addition, import tariffs-which range up to 300
percent on some goods-have been halved and the ban on all manufactured
imports, except that on automobiles, has been lifted.
Nigeria Moves To
Avert Student
Confrontations
Moscow Shops for
Construction
Equipment
commercial banks.
The large devaluation should offset the effect of tariff cuts on imports and im-
prove the competitiveness of Ecuador's nonoil exports-nearly 50 percent of
the total. An IMF team is to visit next week, and once an accord with the Fund
is reached the government hopes to arrange $350 million in loans from
further.
The Buhari regime has delayed university openings, probably through the fall
semester, to avoid possible confrontations with students unhappy over sharp
hikes in boarding fees, according to the US Embassy. Lagos's determination to
decrease its burgeoning federal budget deficit by ending costly university
subsidies will push student food costs five times higher than last year's. Buhari
is taking precautions to avoid a repeat of bloody student riots that were set off
in 1978 when an earlier military government tried to increase school fees. The
US Embassy believes that for now student leaders are resigned to cost hikes
and and are not anxious to spark a violent protest for fear of government
reprisals. Student attitudes could change over the coming months, however, if
the economy continues to decline and the government's image deteriorates
equipment to maintain some supplier diversity.
US bulldozers performed very favorably during testing, most of the equipment
order probably will go to the Japanese because they offer lower prices, more
favorable financing terms, and faster delivery. The Japanese earlier offered the
USSR interest-free first-year financing on a smaller sale of pipelayer equip-
ment. We believe, however, that the USSR may purchase some US heavy
prices and financing terms.
The USSR will need to purchase about 80 to 90 pipelayers, 200 bulldozers,
and 140 excavators-worth about $100 million-for construction of the
Yamburg-Yelets gas pipeline. The Soviets appear to be playing one heavy-
equipment manufacturer off against another to receive the most favorable
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Egypt: How Much Reform?
There is widespread acceptance within the Egyp-
tian Government that reforms are necessary, but
President Mubarak and his ministers fear that
drastic changes in the "social contract" will cause
widespread popular opposition reminiscent of the
1977 bread riots. Public disturbances last week
over subsidy cuts and hikes in social security
contributions will further slow the pace of Egypt's
tentative economic reforms. Additional action by
the government on energy prices, food subsidies,
and exchange rates will, therefore, be slow and
deliberate. When pressed by bilateral and multilat-
eral donors, Cairo will point to the disturbances as
a reason for not pursuing further reform. The
Egyptians will also expect the tentative steps they
have taken to win them more favorable treatment
on issues of importance in their relationship with
the United States.
The need to attack Egypt's pervasive subsidy sys-
tem, bloated bureaucracy, and inefficient parasta-
tals is unquestioned both inside and outside the
country. Egyptian officials are well aware that the
country cannot afford to continue running budget
deficits around 5 billion Egyptian pounds annually
or to depend on the growth of external resources-
either aid or-the country's own foreign exchange
earnings-to partially offset these deficits. The
government is under pressure from its bilateral and
multilateral donors to reduce expenditures and to
undertake measures that will increase efficiency,
spur nonoil exports, and provide a reasonable rate
of return on commercially and donor-financed de-
velopment projects.
Control of current expenditures is the key to re-
straining the budget deficit. The tax system is
considered adequate by the IMF, and investment
has already been squeezed. Among the categories
Egypt
FY 1984
Budget
IMF
FY 1984
Estimates
Egypt
FY 1985
Budget
Wages
2,925.0
2,835.0
3,295.0
Subsidies
1,686.4
2,409.0
2,057.7
Investment
4,400.0
5,054.0
4,865.0
remaining, subsidies and the public-sector wage bill
loom largest. In FY 1984 (July-June), Egypt's
direct-subsidy budget-$3.4 billion at the official
exchange rate-constituted 15 percent of total
budgeted expenditures, according to the IMF.'
Roughly one-third of these funds was spent on
bread, the most politically volatile commodity.
Compounding the problem is the implicit energy
subsidy of about $2.25 billion, which is the differ-
ence between what Egyptians pay for electricity
and petroleum products and world market prices.
The subsidy policy along with high population
growth and higher-than-average economic growth,
has fueled consumption of subsidized goods. Food
imports consume about 30 percent of Egypt's total
foreign exchange earnings-compared with a
' One Egyptian pound (LE) equals US $1.42 at the official ex-
change rate, $0.89 at the commercial or tourist rate, and about
$0.81 at the "own" or parallel market rate.
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Egypt: The Impact of Subsidies, 1970-83
Direct Subsidy Expenditures-
Billion Egyptian Pounds
- Fiscal years.
b Budgeted.
Food Imports
Billion US $
Energy Consumption
Thousand b/d
13-percent LDC average-and domestic energy
consumption is now rising at rates approaching 15
percent annually. Subsidized products are available
to all consumers in unlimited quantities irrespective
of income levels. According to Embassy reporting,
even Egypt's rationing system-covering 97 per-
cent of the population-is often disregarded.
The IMF and the World Bank have put energy
reform at the top of their lists of recommended
policy changes. The World Bank and US AID have
suspended lending for energy projects until Egypt
agrees to raise prices to world-market levels. Since
early 1982, Egypt has increased electricity rates by
30 percent, but the base was so low-less than 15
percent of international levels-that prices remain
well below production costs and the impact on
demand has been minimal.
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12 October 1984
The government indirectly subsidizes wages by
being the employer of last resort for university
graduates. According to US Embassy estimates,
public-sector employees constitute 30 to 40 percent
of the labor force. In FY 1984, the wage bill was $4
billion, higher than the allocation for direct subsi-
dies.
Like many LDCs, Egypt has a confusing system of
exchange rates with the official rate overvalued by
about 40 percent compared with the parallel mar-
ket rate. The overvalued exchange rate has added
to inefficiency in some public-sector firms by giving
them access to cheap imports. It also makes nonoil
exports uncompetitive in overseas markets
The existence of the commercial and parallel ex-
change markets limits the foreign exchange avail-
able to the government for paying its debts. The
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IMF estimated that only 45 percent of Egypt's
foreign exchange earnings took place in the official
market in 1982, and the percentage has probably
declined because the pound has become more over-
valued. Thus, the Central Bank is almost always
short of foreign exchange even when flows into the
country are increasing.
New Cabinet and a New Budget
President Mubarak has instituted a more systemat-
ic and collegial approach to economic policymak-
ing-a marked contrast to President Sadat's more
haphazard and personal approach. Nevertheless,
economic policy decisions continue to be predomi-
nantly shaped by political considerations. President
Mubarak remains extremely cautious and is more
comfortable with slow, almost imperceptible steps
to reform. That caution has been only slightly
tempered by the death of Prime Minister Fuad
Muhi al-Din--considered Mubarak's chief adviser
on political issues and the main obstacle to econom-
ic reform.
The policies of Kamal Hassan Ali, Muhi al-Din's
successor, so far have differed little from those of
his predecessor. The Cabinet is expected to proceed
gradually, with Prime Minister Ali only marginally
more inclined than Muhi al-Din to stand up to
public pressures on economic policy issues. Accord-
ing to US Embassy reporting, earlier this year a
World Bank official put Ali in the camp of those
who advocate caution and restraint rather than
among the short list of reformers that includes the
Ministers of Electricity and Agriculture. In fact, a
Cabinet reorganization last June resulted in the
removal of the latter two from the powerful Com-
mittee on Higher Policy.
Before the budget was presented to the People's
Assembly in September, the government engaged
in a media campaign that appeared to be preparing
the public for extensive reforms, including bread
and energy price increases. Prices of locally manu-
factured cigarettes were raised by 21 to 29 percent,
and the government made it known that it intended
to cut total government expenditures by at least
$400 million.
Conversations with government officials and pre-
liminary analysis of the budget, however, suggest
there are no substantial cuts in expenditures, but
the deficit may narrow slightly because of new
revenue measures. Expenditures are programed to
increase about 15 percent over IMF estimates for
actual expenditures in FY 1984. Increases in the
public-sector wage bill reflect some salary adjust-
ments that took place in early July. The projected
decline in subsidies is linked mostly to plans to
double the price of a loaf of bread, which has been
increased in size but not proportionately. Promised
electricity increases were not announced and, ac-
cording to conversations between the Ambassador
and Prime Minister Ali, will probably be postponed
at least until February.
New tax measures have been announced, but reve-
nue goals probably will fall short of expectations.
Part of the projected 25-percent increase in revenue
is based on oil earnings increasing by 27 percent, an
unrealistic assumption unless there is a substantial
rise in world oil prices. A new, 2-percent surcharge
on incomes over $18,000 has been announced, but
the number of affected taxpayers will be small.
Additional revenue is likely to be generated by new
road taxes and increased fees for passports and
residence permits. Revenues would be further en-
hanced if all imports were revalued at more realis-
tic exchange rates before calculating customs du-
ties.
Even before the demonstrations last week, Cairo's
strategy for reducing the size of the bread price
subsidy was to minimize both the effect on the poor
and the danger of political repercussions. The
government remains concerned that leftist and
fundamentalist exploitation of the issue could cause
unrest to spread, especially with the opening of the
universities this week. To forestall further distur-
bances, Cairo is trying to prominently target price
rises and revenue measures to well-to-do Egyptians
and is publicizing a crackdown on profiteers. In
addition to the prominent announcement of the new
income tax surcharge, President Mubarak has di-
rected that cheaper loaves of bread be produced in
quantities sufficient for all low-income areas, and
prices for macaroni and cooking oil have also been
lowered. Mubarak has instructed ministry officials
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to ensure that prices for other staples are not raised
without high-level approval and merchants that
have illegally done so are to roll back prices to
former levels.
Before the disturbances occurred, President Mu-
barak planned to convene a conference of govern-
ment and opposition leaders and representatives
from the academic community to consider further
policy changes, including additional subsidy reduc-
tions. He probably hopes that the conference will
produce a consensus on the need to reduce subsidies
that will preclude opposition members of the Peo-
ple's Assembly from exploiting the issue. He will
probably scrap the idea, however, if public unhap-
piness spreads.
The government's paranoia about a repetition of
the 1977 bread riots and its determination to
maintain the living standards of the average Egyp-
tian will continue to be primary determinants of the
pace. and, direction of economic policy reform. For
-example, Cairo will continue its piecemeal ap-
proach'to-energy policy reform-with small period-
ic adjustments in electricity prices-unless forced
to adopt a more stringent adjustment program out
of financial necessity. The government will contin-
ue to be reluctant to attempt comprehensive energy
reform because of the linkages to other sectors of
the economy. If public unhappiness over the new
loaf of bread grows, it is very likely that the
government will act to rescind the increases.
The Egyptian Government will almost certainly use
the recent disturbances to counter donor pressure
on economic reform and to lobby specifically for
more favorable US Government support on out-
standing economic issues. Cairo has, in the past,
referred to the 1977 bread riots as proof that it
must proceed cautiously. Egyptian officials will, at
the same time, point to the bread price adjustments
and promised further increases in electricity prices
as proof that they are serious about reform. As a
quid pro quo, the Mubarak government will press
specific demands that the US Government reverse
a decision by a quasi-US Government agency not
Secret
12 October 1984
to finance the participation of a US company in the
El Daaba nuclear project. The agency based its
decision on the infeasibility of the project without
substantial energy price rises. The Egyptians will
also expect the United States to move on its request
for relief on its US military debt. Although this
issue is not directly related to economic reform,
Cairo would view debt relief as an important
contribution to helping it improve its economy.
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Mozambique: Reeling
From Economic Blows
The Mozambican economic situation is among the
worst in Sub-Saharan Africa, with economic activi-
ty in almost continuous decline since the country
became independent in 1975. A critical shortage of
skilled personnel, armed insurgency, deteriorating
economic relations with South Africa, and the
effects of Marxist-oriented economic policies have
discouraged domestic production and foreign in-
vestment. The economic decline has accelerated
since 1981 because of the growing insurgency and a
series of natural disasters including cyclones, flood-
ing, and the worst drought in the country's history
that has produced famine conditions in parts of the
country. Improved relations with South Africa
since the signing of a nonaggression pact with
Pretoria in March and a negotiated cease-fire with
the insurgency movement this month have not yet
had any significant positive economic impact. Mo-
zambique's problems are so deep seated that we see
scant prospect that it can regain preindependence
levels of output by the end of the decade. Even
moderate economic growth by then may require a
substantial reorientation of Maputo's economic pol-
icies.
Causes of Economic Decline
Mozambique has an unusually long list of economic
handicaps:
? Since independence, the country has suffered
from a chronic shortage of skilled personnel. The
illiteracy rate is 85 percent, down from 95 per-
cent in 1975, and 80 to 90 percent of the
population is engaged in subsistence agriculture.
? Poor relations with South Africa since 1975 have
substantially reduced the country's earnings from
transportation services and remittances from Mo-
zambican mineworkers in South Africa, impor-
tant items in Maputo's foreign exchange
earnings.
? The Marxist-oriented economic policies of the
government have hobbled economic activity with
widespread nationalizations, huge and inefficient
state farms, and an extensive regime of price
controls.
? Through 1979, Mozambique sustained substan-
tial economic damage from the Rhodesian civil
war. The closing of the border with Rhodesia in
1976 cost Maputo $100-150 million annually in
Rhodesian transport fees. Punishing raids by the
Rhodesian military against Zimbabwean black
nationalists based in Mozambique also proved
costly to Mozambican transportation facilities
and to the economy.
? Since 1979, Mozambique has been subjected to_.- --'
periodic cyclones, floods, and droughts that have
dealt serious blows to agricultural production.
? Since 1981, agriculture, transportation, and other
economic activity have been severely hampered
by the guerrilla activity of the Mozambique
National Resistance (RENAMO), the antigov-
ernment group backed by South Africa to dis-
courage Mozambican support for African Na-
tional Congress guerrillas operating against
South Africa.
Although the insurgency is expected to be held in
check with the negotiation of the cease-fire this
month, RENAMO has been a major cause of the
present economic chaos. The insurgents-estimates
of their total number range from under 10,000 to
15,000-have been operating in all Mozambican
provinces, attacking rail and road transportation
links, electricity transmission lines, foreign assis-
tance projects, and-foreign workers. This year,
RENAMO has cut the Maputo-Zimbabwe rail line
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at least four times, curtailed the rehabilitation of
the Nacala-Malawi rail line, sabotaged and tempo-
rarily closed the Beira-Mutare petroleum pipeline,
and destroyed several power- transmission -pylons
for the Cabora Bassa hydroelectric project. REN-
AMO attacks on the transport of food relief have
been hampering emergency assistance efforts in
drought-stricken areas. The guerrilla activity has
forced Maputo to divert a sizable portion of its
resources from economic development to defense
and has contributed to the flight of Mozambicans
into neighboring countries.
Economic Impact
The cumulative effects of these developments have
practically crippled the Mozambican economy. Al-
though official Mozambican economic data are few
and unreliable, we estimate-on the basis of US
Embassy reporting that agri-
cultural exports fell last year to one-half the level of
1981 and that sugar production fell to 90,000
metric tons, about one-third of sugar output 10
years earlier. Industry is chronically short of raw
materials and spare parts and operates at no better
than 15 to 20 percent of preindependence capacity.
There are severe shortages of imported petroleum
because of a critical lack of hard currency. Con-
sumer goods have all but disappeared from shops,
and basic commodities are strictly rationed.
The drought has affected eight of Mozambique's
10 provinces. In Inhambane Province alone
100,000 people died last year, according to press
reports. Since 1981, famine has claimed at least
170,000 lives, according to estimates by interna-
tional relief officials. The country has no locally
grown food reserves. Some 1.5 million of Mozam-
bique's 13 million people are now directly depend-
ent on international emergency food aid, principal-
ly from Western bilateral donors. Agricultural
production has been so hard hit that one Mozambi-
can agricultural official last year estimated that it
would take several years to recover even to previous
levels that were themselves inadequate.
Secret
12 October 1984
The famine will continue to worsen this year and
reach a critical point in early 1985, according to a
June United Nations report. A high Mozambican
economic official has stated similar views. In the
meantime, tens of thousands of starving Mozambi-
cans have fled, mainly to Zimbabwe, in search of
food. F--
The country's current account has suffered from
South African economic pressures. Transit fees are
down sharply as Pretoria's exports and imports
through Maputo plummeted to 1.1 million tons last
year, compared with 6.8 million tons in 1973.
Hard-currency earnings from Mozambican
mineworkers.in South Africa have dropped as the
number of workers has fallen to around 45,000
from 118,000 in 1975.
The Mozambican authorities have estimated the
total cost to the country of South African economic
pressure at $4 billion. Most of the amount reflects
the subsidy lost when South Africa unilaterally
canceled a 50-year arrangement in 1978 under
which a portion of the wages of Mozambican
mineworkers was paid to Lisbon in gold at official
prices that since 1971 had been well below market
prices.
In the external accounts, the country's overall trade
deficit widened to nearly $500 million in 1983,
leading to a current account deficit of at least $300
million. Maputo's external debt stood at $1.4 bil-
lion by the end of the year. For the first time
Maputo, in 1983, fell into arrears on debt service
payments to Western lenders; arrears, including
those on trade, totaled $200 million, with a further
$242 million in debt service payments due in 1984.
Coping
The country's economic plight has forced Mozam-
bican President Samora Machel to seek broader
foreign relations since the early 1980s, when it
became obvious that Eastern Bloc countries would
be unable to provide aid on the scale that Mozam-
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Current account balance -167 - 251 - 321 - 283 - 310 - 380
Trade balance -286 -393 -457 -444 -490 -560
Exports (f.o.b.) 232 228 219 197 160 120
Imports (c.i.f.) 518 621 676 641 650 680
92 88 90 80 70
50 48 71 100 110
a Estimated.
b Projected.
bique required. Essentially, Machel has tried to
cultivate the West while remaining in the good
graces of his Communist allies. Most of the major
developments have occurred this year as Mozam-
bique speeded up its effort to exercise dwindling
options for economic support:
? Mozambique in March effected a reconciliation
with South Africa through the Nkomati accord,
under which each country agreed to cease sup-
porting insurgency groups operating against the
other. Maputo expects increased trade, aid, and
investment from South Africa as a result, but so
far it has received few tangible benefits.
? Maputo last month drew up a new Investment
Code more favorable to foreign investment than
earlier statutes. The code is intended to encour-
age investment in agriculture, industry, and min-
ing, areas that have attracted little foreign
capital.
? The country last month joined the International
Monetary Fund and the World Bank. Member-
ship will provide Mozambique with new sources
of financial support and development and techni-
cal assistance. Mozambique is expected to com-
plete a standby arrangement with the IMF soon,
and funds from that organization are expected to
be forthcoming before the end of the year.
? Negotiations with Paris Club and other creditors
have been going on this year for the rescheduling
of Mozambique's $1.4 billion external debt to the
West. These negotiations are expected to speed
up with Maputo's IMF membership and a stand-
by arrangement with the Fund. The rescheduling
would ease the pressure on Mozambique's bal-
ance of payments and provide a more orderly
In our view, the shifts in Mozambique's foreign
economic policy will not yield substantial results for
some time. We do not expect economic recovery
over the next two years at least because of the
ravages of drought and the disruption caused by
insurgent activity. Despite the cease-fire negotiated
with RENAMO, the lack of a more lasting accom-
modation with the insurgency movement probably
will hamper the inflow of foreign capital that
Mozambique badly needs.
In our judgment, Mozambique's economic pros-
pects over the longer term are not bright. The
economy was never a robust one, even in colonial
times, and the economic structure, based on a
limited range of agricultural products subject to
fluctuating world prices and on transportation ser-
vices vulnerable to events in neighboring countries,
is unlikely to undergo much change.
South Africa holds the key to Mozambique's eco-
nomic fortunes as Mozambique's largest trading
partner and the chief source of foreign exchange
earnings for transportation and labor that largely
support the Mozambican economy. We expect Pre-
toria to condition its contribution to the revitaliza-
tion of the Mozambican economy on a greater shift
from Marxist ideology by Maputo than has taken,
place so far.
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Debtor LDC Import Cuts:
A Major Factor
in Global Trade Decline
Import reductions by 12 key LDC debtors' over
the past two years have sharply depressed the
export earnings of both developed countries and all
LDCs, with industrialized countries bearing the
brunt of export declines. LDC exports also suffered
as close trade ties, particularly between Latin
American debtors, were disrupted by austerity
measures. Although first-half 1984 data indicate
the decline in debtor LDC imports is bottoming
out, we do not expect a return to rapid import
growth in the near future, which will continue to
retard world export growth.
Economic recession and tough austerity measures
forced the 12 key debt-troubled countries to slash
imports by $47 billion during 1982-83. Several
recorded declines in imports of 50 percent or more
between 1981 and 1983. Among key countries,
Brazil cut imports from $24 billion to $17 billion;
Mexican imports fell $16 billion over the period;
and Nigeria reduced foreign purchases from $18
billion in 1981 to $9 billion in 1983.
Impact on Partner Exports
Key debtor import cutbacks contributed substan-
tially to the overall decline in world exports from
1981 to 1983. The $47 million in lost sales to these
12 accounted for over one-fourth of the overall
decline in world exports during the period. Industri-
alized countries suffered the brunt of export de-
clines, but overall LDC foreign sales were also
adversely affected, as LDC exports to key debtors
dropped 33 percent.
' The group includes Argentina, Bolivia, Brazil, Chile, Colombia,
Ecuador, Indonesia, Mexico, Nigeria, Peru, the Philippines, and
Changes in Non-Communist Exports: Billion US S
Influence of Key LDC Debtors
World exports
478.3
312.8 -166.6
To key debtors
23.9
39.8 -47.2
336.7
165.7 -78.6
To key debtors
16.7
29.0 -36.6
Japan
21.2
49.2 -4.5
To key debtors
1.5
6.1 -6.2
United States
60.7
51.7 -33.2
To key debtors
9.8
13.4 -16.2
European Big Four a
147.2
28.7 -31.4
To key debtors
2.7
6.5 -9.4
LDCs
141.6
147.1 -88.0(T
To key debtors
7.2
10.8 X10.6
Oil-exporting LDCs
61.6
68.9
-85.0
To key debtors
2.7
4.5
-3.5
Nonoil LDCs
80.0
78.2
-3.0
To key debtors
4.5
5.6
-7.1
Argentina
2.1
1.3
-1.2
-0.1
-0.7
3.1
8.1
-1.4
To key debtors
0.9
2.2
-2.3
Mexico
4.8
10.4
1.8
To key debtors
0.1
0.7
-0.2
Nigeria
5.4
4.0
-7.0
To key debtors
0.1
0.6
-0.6
4.8
5.7
-3.8
1.1
-0.5
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OECD. Although sales to the 12 debt-troubled
countries account for only 5 percent of total OECD
exports, losses in these markets were almost half of
the $79 billion overall drop in OECD exports over
the past two years. Most of the cuts came in
machinery, transport equipment, and other indus-
trial goods.
The United States was particularly hard hit be-
cause 15 percent of all US exports go to the 12
debtor countries. Austerity measures, especially by
important Latin American trading partners, result-
ed in a $16 billion, or 40 percent, decline in exports
to key debt-troubled LDCs between 1981 and
1983. This was nearly half the $33 billion drop in
total US exports during the period and, contrasts
with an average annual 20-percent increase in US
exports to this group of LDCs between 1970 and
1980.
Japanese exports are less dependent on sales to key
debtor countries, but a 40-percent decline in ex-
ports to this group between 1981 and 1983 proved a
drag on export growth. Japanese exports declined
$4.5 billion between 1981 and 1983. Had sales to
key debt-troubled LDCs remained at the 1981
level, total exports would have risen nearly $2
billion during this period.
Among other major industrialized countries:
? West Germany's sales to key debtor LDCs
dropped almost $4 billion during 1982-83, over
half of the decline in West Germany's total
exports.
? France's exports to these LDCs fell $1 billion
between 1981 and 1983. Exports to Chile, Nige-
ria, and Venezuela declined by more than 25
percent.
? The United Kingdom's exports to debtor LDCs
fell $3 billion between 1981 and 1983, with
Nigeria accounting for one,-third of the drop.
? Italy's sales to this group of LDCs dropped nearly
$2 billion during the period, three-fourths of the
Secret
12 October 1984
decline in Italy's total exports. Sales to Argenti-
na, Chile, and Mexico fell more than 50 percent.
Less Developed Countries. The import cuts of key
debt-troubled countries depressed overall LDC ex-
port earnings as well. Although sales to key debtors
account for only 4 percent of total LDC exports, 12
percent of the $88 billion decline in overall LDC
exports between 1981 and 1983 can be attributed
to the drop in shipments-to these debt-troubled
countries. Nonoil LDCs were especially hard hit,
recording a $7 billion decline in sales to debtor
LDCsduring the period, more than offsetting a $4
billion increase in exports to the OECD.
Intradebtor exports-sales from one debt-troubled
country to another-fell 45 percent between 1981
and 1983. Several large debtor nations recorded
substantial reductions in exports to other key
debtors:
? Argentine exports dropped 45 percent-from $1.5
billion in 1981 to $848 million in 1983-more
than half the overall decline in Argentina's total
foreign sales during this period.
? Brazilian sales to debtor LDCs fell over $2 billion
during the 1982-83 period, as exports to Mexico
and Nigeria declined 75 percent.
? Venezuelan exports fell from $1.7 billion in 1981
to $1.2 billion in 1983. Sharp declines in sales to
Brazil and Chile accounted for most of the drop.
Developments This Year
Preliminary first-half 1984 data indicate the de-
cline in key debtor imports is bottoming out. Cer-
tain debtors such as Chile and Mexico have even
increased imports over the same period in 1983.
Reflecting this trend, first-half OECD exports to
key debtors were up 0.5 percent over a year earlier,
the first such increase in three years. Recovery of
OECD export sales to debtors, however, has been
uneven. Among major industrial countries, the
United States, Italy, and West Germany rang up
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export increases totaling $1.6 billion, while France,
Japan, and the United Kingdom recorded a com-
bined $1.2 billion drop in sales to these LDCs.
Despite some recovery in key debtor imports this
year, we do not expect a return to rapid import
growth soon. In our judgment, debtor LDC imports
will grow at a much slower rate than during the
1970s, which will retard world export growth. For
example, if key debtor imports rise 11 percent next
year, world exports would still be $9 billion less
than if these countries' foreign purchases were to
grow at the 22-percent rate of the 1970s.
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Zimbabwe's Military:
The Impact of Economic
Austerity
Despite the foreign exchange crunch and signifi-
cant cuts in the defense budget, the Zimbabwe
Defense Force continues its modernization pro-
gram. Although we expect that the armed forces
will have to reduce, spread out, or forgo some
foreign procurement, defense expenditures in fiscal
year 1985 (July 1984-June 1985) probably will
exceed allocations, increase friction within the gov-
ernment, and hinder negotiations between Harare
and the IMF.
Since independence in 1980, the military has been
tasked with both defending against foreign threats
and helping the understrength national police to
maintain internal security. Recently, however,
Harare appears to be reevaluating its futile pursuit
of an anti-South African capability.
The Army assumed a third mission in November
1982 by sending three battalions into Mozambique
at the request of President Samora Machel. These
units-the first deployed outside Zimbabwe-were
to protect the critical Beira-Mutera oil pipeline
from Mozambican insurgents, and to patrol the
border with Mozambique's Tete Province. Zimba-
bwe increased its commitment in Mozambique this
year when a fourth battalion was sent to replace
Mugabe and the Military
nied.
The civil war yielded two tribally based and
competing guerrilla armies, an expanded white
Rhodesian security force, and the general militari-
zation of Zimbabwean society. At independence,
all these armed forces were combined into a na-
tional Army. Deeply rooted tribal and personal
rivalries were often only papered over, however, 25X1
and have resurfaced as several units have muti-
Chitauro.
Mugabe moved to strengthen discipline and firmly
control the Army, initially by retaining the defense
portfolio for himself and by restructuring the
forces. As the Army shrank from over 60,000 to
about 42,000 troops today, Mugabe attempted to
create a force that would be dominated by those
former guerrillas loyal to the ruling party. The
government also created two Army units composed
of party loyalists a
5,000-man 5th Brigade and a 3,000-man Presiden-
tial Guard. Moreover, the
People's Militia, organized in 1982 to help control
dissidents and ultimately to include 20,000 mem-
bers, is intended to be the ruling party's "eyes and
ears, " according to Secretary of Defense James
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12 October 1984
Boundary representation is
not necessarily authoritative.
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ineffective Mozambican forces escorting truck con-
voys from Malawi to Zimbabwe. We believe that
Zimbabwe now has about 3,000 troops in Mozam-
bique.
The Political and Economic Backdrop
Prime Minister Robert Mugabe's stated goal is to
transform Zimbabwe into a one-party socialist
state. Financial realities have slowed Mugabe's
progress toward this goal and his economic reforms
so far have been cautious. Zimbabwe now faces its
worst economic crisis since independence. Three
years of devastating drought and the continuing
effects of worldwide recession have caused a slow-
down in real GDP growth from annual rates of 12
percent in 1980 and 1981 to only 2 percent in 1982,
and a decline of about 3 percent last year. Harare
has reacted by cutting back on social spending and
food subsidies, imposing wage controls, increasing
Zimbabwe: Defense Expenditures
as a Share of Total Budgetary
Expenditures, 1980/81-1984/85
taxation, and restricting foreign payments.
Zimbabwe's budget for fiscal year 1985 is aimed at
slowing the rising government deficit. Expenditures
are set to increase by only 7 percent, although the
prevailing rate of inflation is 19 percent. Neverthe-
less, the planned deficit of $560 million represents
1 1 percent of projected national income-substan-
tially above the IMF's guideline of 5.5 percent-
and may hinder negotiations between Harare and
the IMF. Harare's last standby agreement with the
IMF collapsed when it could not meet the Fund's
targets, and, as a consequence, little foreign ex-
change is available for overseas purchases.
To resume the growth it enjoyed in 1980 and 1981,
Zimbabwe must resolve its foreign payments prob-
lems-including a ratio of debt service to exports
exceeding 25 percent-and reduce government
expenditures. Foreign exchange difficulties will
worsen in fiscal year 1985 because Zimbabwe
needs to import up to 400,000 tons of corn and
wheat. Short-term opportunities to improve export
performance are limited by the drought and by
continued soft markets for Zimbabwe's mineral
exports. Longer term prospects hinge on Harare's
ability to attract foreign investment. Zimbabwe's
investment policies, however, remain ambiguous;
Harare welcomes investment, but manages the
economy through controls that diminish private-
sector incentives. We expect foreign exchange con-
straints to plague Zimbabwe for several years.
The Military and the Budget
Military expenditures, particularly foreign pur-
chases, will be targeted to narrow the budget
deficit. The military's share of government expend-
itures has declined steadily since fiscal year 1981,
even though defense spending in the past three
fiscal years has exceeded allocations. The
postindependence demobilization of one-third of
the large national Army slowed the rate of increase
in defense spending, while new social programs
spurred increases in nondefense allocations. F_
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An important trend has been the increased de-
mands by the military on Zimbabwe's scarce for-
eign exchange. Whereas over 75 percent of the
fiscal year 1982 defense budget was devoted to
personnel costs, emphasis has shifted recently to-
ward foreign equipment and training of blacks to
take over from white officers who are emigrating.
Moreover, although total defense spending in terms
of local currency has grown, the declining value of
the Zimbabwean dollar has reduced the overseas
purchasing power.
ish firms sold military equipment to Zimbabwe.
The most notable of these purchases were the jets
from British Aerospace. Zimbabwe's Air Force
suffered a serious loss in July 1982, when sabotage
of the Thornhill Base destroyed or damaged a
dozen of these aircraft. The subsequent trial of
several senior white officers accelerated the depar-
ture from the Air Force of other white personnel.
Britain was supplanted as the major source of
foreign military assistance following a 1980 North
Korean commitment of military equipment
mored units since late 1983.
China also has become an important source of
military equipment and training. About 30 Chinese
instructors have been training Zimbabwean ar-
Harare has ordered for delivery next year
The defense allocation has been cut 16 percent in
nominal terms for the fiscal year 1985 budget, an
almost 36-percent cut in real terms on domestic
purchases and 60 percent in real terms on equip-
ment purchased abroad. Much of the reduction in
foreign purchases represents the transfer of expect-
ed fiscal year 1985 funds into fiscal year 1984 to
cover the accelerated purchase of the Brazilian
armored cars. Funds for operation and mainte-
nance of the Air Force are scheduled to be cut from
$19 million to $12 million.
Foreign Military Procurements
Zimbabwe relies on Britain, North Korea, China,
Pakistan, and Brazil for military training and over
90 percent of its equipment purchases. After inde-
pendence, a British Military Advisory and Training
Team (BMATT) arrived to assist with the transi-
tion to a national Army. The BMATT's services
were funded entirely by London, and several Brit
Secret
12 October 1984
20 Chinese F-6 jet fighters. Moreover,
Zimbabwe's Air Force suffers from shortages of
skilled pilots and navigators, maintenance equip-
ment, and repair skills. Last year, Zimbabwe
signed an agreement with Pakistan for three years
of training and logistic support for the Air Force.
Zimbabwe's recent purchase of 90 Cascavel ar-
mored cars from Brazil is the largest defense
acquisition by Harare since independence. The
deal, part of a five-year program announced in
early 1983 to replace obsolete Army vehicles, in-
cludes spare parts as well as training for gunners,
drivers, and maintenance personnel. The purchase
almost triples Zimbabwe's inventory of armored
cars. The new relationship with Brazil further
diversifies Zimbabwe's sources for arms but com-
plicates training and logistic support.
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Zimbabwe: Major Arms Deliveries and Training, 1980-84
1981 22 T-55 tanks, fourteen 122-mm artillery
and rocket launchers, 30 mortars, and over
4,000 rifles
1981 Two Canberra bombers, five Hawker $2 million, Britai
Hunter fighters
1983 Small arms and ammunition $4 million, USSR
1983 17 SF-260 turboprop trainers and two Bell $12.5 million, Italy
412 helicopters
130 instructors reduced to
60 in 1983
fficers, and logistics
specialists for Air Force
$17 million deal includes
four more aircraft to be..
delivered
Largest arms deal since
independence
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Although Zimbabwe will remain incapable of de-
feating a determined South African invasion, for-
eign training and deliveries of military equipment
are strengthening Zimbabwe's forces to deal with
lesser and more likely threats. Most notably, im-
proved mobility will enhance antidissident opera-
tions in Matabeleland and perhaps enable more
effective protection of truck convoys in Mozam-
bique.
Although we expect a supplemental defense alloca-
tion and overspending this fiscal year, in our judg-
ment, the military will have to restrain its modern-
ization program. Defense funding probably will
become an increasingly contentious issue in the
Zimbabwe Cabinet, as well as in negotiations
between Harare and the IMF.
The military continues to explore other possibilities
for, acquiring major defense items. Such plans are
likely to depend on concessionary financial terms,
which many West European and Third World
suppliers are increasingly reluctant to provide. As a
result, Zimbabwe's financial problems might pro-
vide an opportunity for the Soviet Bloc to expand
its incipient arms relationship, something that
Harare has so far resisted.
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Smaller LDC Debtors:
Economic Plight
and US Interests'
Although Mexico, Brazil, and Argentina have been
the focus of discussion on LDC debt, a number of
smaller LDCs with equally severe economic diffi-
culties have received considerably less attention.
The size of the debt of these countries is small
compared with that of the top three debtors, but
these countries' debt-service burdens relative to
their economies are as great as those of the Big
Three. US interests in these countries are consider-
able, moreover, and the potential damage to US
interests is broader than impacts on the interna-
tional financial system.
Colombia, Egypt, Indonesia, Morocco, Pakistan,
Peru, and the Philippines best illustrate the prob-
lems of smaller debtors where the United States
has substantial interests. These seven countries
have a combined external debt of $125 billion,
roughly half the combined total of Mexico, Brazil,
and Argentina. In all but Egypt, Indonesia, and
Pakistan, debt-service requirements are more than
half of total export earnings, and all seven have
current account deficits. 0
Some of these countries have taken appropriate
economic adjustment measures, while others have
shunned tough measures or have insulated their
population from external adversities:
? Peru and the Philippines are in the midst of
severe economic and political crisis.
? Egypt and Morocco face increasingly difficult
problems resulting from the need to cut rapidly
growing budget expenditures.
? Colombia's economy is in moderate trouble.
? Indonesia and Pakistan, although not on a solid
footing, appear to be in little immediate danger.
Top of the Debtor List, 1983a
Legend 40 Severe problems
0 Moderate difficulties
0 Potential Problems
0 No current difficulties
Brazil
101.08
0
Malaysia
17.18
Mexico
98.10
0
Algeria
16.37
Argentina
43.22
0
Nigeria
15.01
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0
South Korea
39.30
0
Peru
13.10
0
Venezuela
34.43
0
Thailand
13.09
0
Indonesia
28.68
0
Colombia
11.34
0
Egypt
25.69
0
Morocco
11.00
0
Philippines
23.05
0
Pakistan
10.40
0
India
22.51
0
Taiwan
9.82
0
Chile
18.72
0
Sudan
7.61
z' CIA estimates.
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All seven countries, however, are highly vulnerable
to external economic conditions such as high inter-
est rates on debt, fluctuating commodity prices,
uncertain commercial lending, and Western aid
cutbacks.
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DI IEEW 84-041
12 October 1984
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Share of Total LDC External Debt, 1983
Mexico
Brazil
Argentina
Colombia
Egypt
Indonesia
Morocco
Pakistan
Peru
Philippines
The Philippines has come to terms with the IMF on
an economic stabilization program but still needs a
fifth 90-day moratorium on principal payments.
Debt now exceeds $25 billion. The country has one
of the lowest growth rates in Asia and must cope
with a large current account deficit, over 50 per-
cent inflation, dwindling foreign exchange reserves,
increased foreign exchange controls and a turn to
black-market alternatives, a weakening domestic
financial system, and in 1983 substantial capital
flight. The deteriorating economy and resulting
austerity measures have closed businesses, restrict-
ed imports necessary for production, increased un-
employment,,encouraged hoarding and panic buy-
ing of.consumer goods, and caused declines in
school enrollments. Labor strikes, widespread dem-
onstrations, and increased strength of the New
People's Army-the arm of the Communist Party
of the Philippines-add to the country's instability
and turmoil.
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12 October 1984
When oil prices dropped in 1982-83, Indonesia
quickly devalued the rupiah, reduced subsidies,
scaled back or eliminated major development pro-
jects, deregulated banking, and instituted tax re-
forms. Although these actions helped external ac-
counts and restored confidence, they have hurt
Indonesians. Inflation is double digit, violent crime
has increased, and unemployment has soared. With
the world's fifth-largest population, high birth rates
are worsening the employment outlook. Indonesia's
dependence on oil exports and the recent decline in
new investment make the country's economic fu-
ture unclear.
Pakistan is not in economic upheaval, but it is one
of the world's poorest countries, with formidable
external debt-servicing requirements, according to
the US Ambassador in Islamabad. Although its
economy grew rapidly for six consecutive years
through 1983, it has had several debt reschedulings
and an IMF Extended Fund Facility for which it
could not meet conditionality requirements in 1984.
The economy slowed in 1984, a result of a disas-
trous cotton crop and disappointing wheat harvest.
The fragile economy could be weakened further by
extreme population growth (now 2.6 percent); dete-
riorating real income for an already impoverished
populace with highly skewed income distribution;
continued decline in overseas labor remittances and
return of overseas workers to the labor force; and
tensions aroused by increased numbers of Afghan
refugees.
Morocco faces acute financial difficulties resulting
from outside events and domestic economic poli-
cies. Severe droughts since 1981 have caused seri-
ous shortfalls in agricultural production and re-
quired heavy grain imports. On the export side,
phosphate markets collapsed, European trade bar-
riers have restricted Morocco's citrus and vegetable
exports, remittances from overseas workers have
leveled off because of economic slowdown in West-
ern Europe, and tourism receipts have dropped.
According to press reports, the war in the Western
Sahara is pushing up defense costs, which now
claim as much as 40 percent of the administrative
budget. Expenditures for food subsidies and.educa-
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Composite of Ten Debtor Countries, 1983
Billion US $
External
Debt
Debt
Service
Merchants
Export
Current
Account
Real
Growth
Inflation
Colombia
11.3
1.6
3.1
--3.2
-0.8
20
Egypt
25.7
4.2
9.8
--2.2
6.0
16
Indonesia
28.7
4.0
21.1
--5.5
2.3
12
tion also drain the national coffers. Officials expect
the population to increase by 60 percent by the year
2000 and further strain economic resources. Unem-
ployment is approaching 30 percent and will worsen
as the young and growing population enters the
market. In addition to these economic and social
pressures, Morocco must service an $11 billion debt
that required 45 percent of its export earnings
before the 1983 rescheduling.
Egypt lives beyond its means and relies on external
sources of income. Excesses in food and energy
consumption supported by government subsidies
have been masked by strong income performance
from petroleum exports, Suez Canal revenues, tour-
ism, and overseas worker remittances. Even so,
Egypt's trade and current account balances are in
deficit; Egypt ranks seventh among developing
country debtors, and in 1983 it paid $4 billion in
debt service. The country now imports 50 percent
of its food; energy consumption rises 14 percent
annually, and transportation, sewer, water, and
other services are breaking down. Widespread pov-
erty contrasts sharply with the wealth of the few.
Egypt must deal with over I million births annually
and needs to create 400,000 new jobs every year.
According to press reports, Mubarak recognizes
that the economy's decline threatens Egypt's stabil-
ity, particularly by encouraging Moslem and leftist
radicals who oppose his regime. 0 25X1
Peru's financial crisis has put the country on a-
collision course with the IMF, foreign creditor
banks, and the labor force. The US Embassy
reports that Peru is ineligible to draw further on its
IMF standby loan because of the excessive govern-
ment deficit. This, in turn, jeopardizes foreign bank
credit and debt financing, but political pressures 25X1
will make reconciliation with the IMF difficult.
The domestic economic problems are as great. Per
capita income has fallen 25 percent since 1980, and
underemployment exceeds 50 percent. Despite gov-
ernment-spending cuts and increased taxes, infla-
tion races beyond 100 percent, and the budget
deficit is twice limits suggested by an IMF standby
agreement signed in April 1984. Social unrest,
general strikes, and continued attacks by the Mao-
ist insurgency, Shining Path, prevent President
Belaunde from taking further austerity measures
that will allow the government to service overdue
debt payments and comply with the IMF.
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Colombia has withstood the economic turmoil en-
dured by most of its Latin American neighbors, but
it nonetheless is grappling with difficult economic
problems. Much of the financial squeeze on Bogota
has resulted from'kuilt by association" with other
Latin nations. Banks have refused to rollover
Colombia-''s short-term debt-according to press
reports, to have something positive shown on their
books-and have resisted lending for a $700 mil-
lion energy project loan package. Banks also criti-
cized Colombia for hosting the June 1984 Cartage-
na meeting for Latin debtor countries arguing that
this action would put it in the same troubled
category as other debtors. Domestically, President
Betancur's policies in 1982 to increase public
spending and open markets to imports were sup-
ported by high international prices for coffee and
illicit cocaine. Since these prices have dropped from
their peak levels, the government has had to cope
with declining export earnings and dwindling re-
serves. According to press reports, Colombia hopes
its economy can hold out until its new coal project
and oil discoveries come.on line. At the same time,
Betancur is wooing foreign investment and trying
to change Andean Pact provisions that restrict
investment. He also is hoping that minidevaluations
will avoid the need for a larger currency devalua-
tion. Still, for political reasons, Betancur is resist-
ing an IMF arrangement that would call for great-
er austerity measures.
These countries' present and potential economic
and debt-servicing problems could threaten signifi-
cant US interests that go beyond stability of the
international financial system
In foreign policy, the United States depends on
these countries' pro-West and moderating influence
in international forums. The Philippines and Indo-
nesia play this role in North-South dialogues;
Pakistan and Morocco counsel moderation on
Arab-Israeli issues within Arab meetings; and
Egypt is key to keeping the Camp David accords
alive. Morocco was instrumental in returning Egypt
to the Islamic Conference and in marshaling Arab
Secret
12 October 1984
support for the 1982 US Middle East peace initia-
tive. In Latin America, Colombia has worked
within the Contadora Group to resolve Central
America's conflict
Severe economic problems in these countries have
lead to a weakening of support of US foreign policy
interests. For financial reasons, some already are
seeking increased ties with the Soviet Bloc and, in
the case of Morocco, with Libya. Indonesia has
shown increased interest in Moscow's overture to
improve trade relations, and the pace of official
visits has increased. The Soviet Union is seeking
increased commercial ties with the Philippines. The
rest of Asia almost surely is watching how the
United States treats an ally when in economic
need.
Economic decline also may injure US strategic and
military interests in these countries. Insufficient
US economic assistance, in the view of the govern-
ments or populace, could affect military agree-
ments and transit rights. The United States de-
pends on military and commercial passage through
Indonesian waters and air space, and the Malacca
Straits are particularly important. Bases in the
Philippines are the key components of the United
States's main line of defense in the Pacific and
Southeast/South Asia. Clark Air Base is the larg-
est US overseas base, and the Subic Bay complex is
the largest naval supply depot in the world. Paki-
stan is the frontline state between Soviet-occupied
Afghanistan and sea approaches to the Persian
Gulf. Morocco gives the United States military
access and transit and the use of four airbases for
training and emergencies. Morocco also controls
the "choke-point" entrance to the Mediterranean.
US commercial interests also rank among impor-
tant concerns. The United States has trade surplus-
es with Colombia, Egypt, Morocco, and Pakistan,
and has only slight deficits with Peru and the
Philippines. Given the widening US trade deficit,
US export markets in developing countries are
critical. The US investment position in these devel
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US Exports, Imports,
and Investment Position, 1983
Legend - Imports
~ Exports
- Investment
Colombia
Egypt
Indonesia
Morocco
Pakistan
Peru
Philippines
oping countries-especially in Colombia, Indone-
sia, Peru, Egypt, and the Philippines-also contrib-
utes to US income that helps offset the US current
account deficit. Because these countries have had
to cut imports as part of economic-adjustment
programs, US exports have dropped in 1983 below
1982 levels to all but Pakistan and Morocco. US
firms in these countries also have had trouble
importing goods and selling products and have
experienced declines in production.
The United States also has a substantial "aid
investment" in these middle-income countries.
With the deterioration of their economies, much of
the development progress supported by US assis-
tance has eroded. In the case of military assistance,
US Economic and Military Assistance, Million US $
FY 1984
Worldwide
16,300.6
Colombia
11.3
Egypt
2,504.3
9 10 Morocco
arrears on debt service have accumulated. Coun-
tries are asking for increased economic assistance
or bridge loans (Colombia, Peru, and the Philip-
pines) and for rescheduling of military debt (Egypt).
Other US interests include drug enforcement pro-
grams with Pakistan and Colombia and an agree-
ment with Morocco for a new Voice of America
transmitter-the largest in Europe. In addition,
applications for immigration into the United
States, as well as illegal immigrants, increase when
economies deteriorate.
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12 October 1984
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