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• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP97-00771R000707520001-1
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 32
• Document Creation Date: January 12, 2017
• Document Release Date: October 4, 2010
• Sequence Number: 1
• Publication Date: May 10, 1985
• Content Type: REPORT

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Directorate of -Sii-i ,t
Intelligence
Weekly
International
Economic & Energy
10 May 1985
DI IEEW 85-019
10 May 1985
Copy 683
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Secret
International
Economic & Energy Weekly
10 May 1985
iii Synopsis
Perspective-IMF Conditionality: Compliance and Political Fallout
dan? The New Regime's Economic Dilemma
7 T e Caribbean:
Coping With Prolonged Austerity
.Zimbabwe: Delaying Tough Economic Choices
ALA
17 _Saudi Arabia: Expatriate Laborers There To Stay
NESA
21 Briefs Energy
International Finance
Global and Regional Developments
National Developments
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Comments and queries regarding this publication are welcome. They may be 25X1
directed to Directorate of Intelligence,
Secret
10 May 1985
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Secret
International
Economic & Energy Weekly
Synopsis
1 Perspective-IMF Conditionality: Compliance and Political Fallout
In our judgment, the financial community's primary demand on LDC debtors
this year has shifted from simple adoption of an IMF standby agreement to
vigorous compliance with economic performance targets. This greater empha-
sis on compliance however, could lead to greater levels of political unrest in
,I.- I___ i~ 25X1
3 Sudan: The New Regime's Economic Dilemma
Sudan's new regime is faced with the need to revitalize the economy while im-
plementing rigorous austerity and reaching agreement with the IMF on
arrears. Recent statements by the new leadership suggest, however, the regime
will move very slowly toward introducing further reforms F 25X1
7 The Caribbean: Coping With Prolonged Austerity 25X1
A significant improvement in the Caribbean area's deep-seated economic
slump is unlikely any time soon. Growing frustration with falling standards of
living also could give opposition groups-as well as Moscow and its surro-
gates-new opportunities to broaden their influence. In these circumstances,
pleas for US aid are increasingly likely.
13 Zimbabwe: Delaying Tough Economic Choices
Harare faces several difficult choices between policies needed to sustain the
economic recovery and a commitment to redistribute national wealth. Prime
Minister Mugabe appears determined to impose his vision of African social-
ism, but probably is realistic enough to backtrack temporaril to secure a new
IMF agreement and to shore up Zimbabwe's finances. 25X1
17 Saudi Arabia: Expatriate Laborers There To Stay
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The economic downturn as a. result of declining oil revenues is causing a shift
in the composition and sectoral employment of foreign workers, but Riyadh's
efforts to limit the number. of expatriates in the country have met.with only
limited success. Saudi Arabia will continue to rely on expatriates for about
half its work force into the next decade because their presence is essential to
the country's economic growth and productivity. 25X1
iii Secret
DI IEEW 85-019
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International
Economic & Energy Weekly
10 May 1985
Secret
Perspective IMF Conditionality: Compliance and Political Fallout
In our judgment, the financial community's primary demand on LDC debtors
this year has shifted from simple adoption of an IMF standby agreement to
vigorous compliance with economic performance targets. Nearly 90 percent of
IMF drawings-compared with only about 75 percent in 1983-are now tied
to strong economic policy conditions, and we believe the IMF is monitoring
debtors' economic adjustment efforts with closer scrutiny and greater resolve.
Moreover, compliance with IMF conditionality-the key to obtaining official
reschedulings and new money commitments from banks-is becoming an
increasingly important factor in pledges of bilateral and multilateral assistance
as well. In light of a seemingly endless string of missed performance targets,
the Fund must exact some degree of economic adjustment from debtors if it is
to maintain its credibility with the banking community.FI 25X1
The IMF is in the delicate position of trying to maintain the cooperation of
both debtors and creditors to ensure an orderly international adjustment
process. This greater emphasis on compliance, however, could lead to greater
levels of political unrest in the short term. Conditionality by the Fund and for-
eign creditors is often resented by domestic groups-performance targets
typically involve a decline in living standards through cuts in subsidies and
other government spending-and can serve as a rallying point for opponents of
the government. Demonstrations and strikes have been commonplace in
countries such as Jamaica and the Dominican Republic, where a halfhearted
commitment to adjustment has resulted in little or no economic improvement.
This year Argentina and the Philippines could face similar problems as their
governments strive to qualify for needed debt restructuring.) 25X1
Over the longer term, we believe the linkage between economic compliance
and political stability hinges heavily on the ability of the government to
implement and adhere to a comprehensive adjustment program. If such a
program can produce tangible economic benefits, serious political unrest often
can be avoided. For many LDC debtors, however, austerity measures will be
watered down in the face of domestic opposition. Few economic benefits will be
realized, and, as the difficulties of austerity drag on, the potential for unrest
heightens. Countries that choose to postpone austerity measures risk the loss of
needed IMF funding and debt relief and leave themselves open to worsening
economic conditions. This would lengthen the adjustment process and increase
the likelihood of more serious and prolonged political instability. 25X1
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Sudan: The New Regime's
Economic Dilemma
Sudan's interim government faces a staggering
array of economic problems-the legacy of years of
mismanagement and, more recently, drought and
civil war. While attempting to cope with depleted
stocks of food, fuel, and spare parts and an econo-
my that has been at a virtual standstill since the
April coup, Khartoum's new leadership must also
begin implementing rigorous economic austerity
and reach agreement with the IMF over its arrears.
The recent end to a yearlong partial freeze on
foreign financial assistance is providing desperately
needed foreign exchange but will not resolve. the
regime's economic problems, even in the short
term. To revive the moribund economy, Khartoum
will also need to modify debilitating foreign ex-
change rules and export practices as well as instill
private-sector confidence in its economic policies.
Recent statements by the new leadership suggest,
however, the regime will move very slowly toward
introducing further reforms and will, instead con-
centrate its efforts initially on governmental reor-
ganization. A noticeable bias against the IMF
among civilian policymakers may also present
problems in dealing with the arrearages issue and
could even lead to circumventing previously
agreed-upon reforms.
The new government is giving highest priority to
the reestablishment of adequate food and fuel
stocks, particularly in the Khartoum area. Al-
though the Sudanese economy has had chronic
shortages, the supply disruptions in the three
months preceding the coup were unusually severe.
The Nimeiri regime's outlawing last February of
the private, or free, foreign exchange market con-
tributed to the shortages. Traditionally, this market
has served as the major conduit of remittances
from Sudanese working abroad.. It also provided
Current account -769 -566 -647
balance
Trade balance -943 -656 -653 -650
Exports 573 732 675 600
Cotton 175 344 310 250
Imports 1,516 1,388 1,328 1,250
Net services 174 90 6 85
Remittances 415 380 350 300
Other (including -241 -290 -344 -215
interest payments)
Fiscal year data beginning 1 July of the stated year.
b Estimated.
c Projected.
The government reportedly is making some prog-
ress in easing supply disruptions. Drought-related
famine remains serious in much of rural Sudan, but
we do not view this issue as a serious threat to the
regime's stability. Sudanese Government officials
claim there is sufficient flour and wheat available
or in shipment to satisfy requirements through
July.
Resumption of foreign financial assistance has been
instrumental in alleviating some shortages. Saudi
Arabia's timely delivery of'100,000 tons of petro-
leum beginning in April, together with an addition-
al $50 million in Saudi balance-of-payments sup-
port and $67 million in US assistance, has
temporarily eased public-sector foreign exchange
constraints. In recent weeks the long lines at filling
stations in Khartoum have begun to dissipate, and
the government has eased its draconian gasoline
financing for most nongovernment imports.
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Sudan: External Debt Million US $
Service Obligations in 1985
1984
Arrears
Obligations
Falling Due
in 1985
Total
234
1,251
1,485
55
168
223
Bilateral creditors
67
627
694
Commercial banks
0
342
342
rationing system. The new government's adherence
to the Petroleum Facility-a financing mechanism
sponsored by the United States and Saudi Arabia
and designed to reduce the cost and regularize the
delivery of oil imports-should reduce the likeli-
hood of crippling energy shortages in the future.
Despite improvements in the supply situation, we
believe it is essential to quickly reintroduce a legal,
private foreign exchange market. Even if the new
regime establishes and maintains an attractive offi-
cial rate for. foreign exchange, the private market
will likely remain the most efficient mechanism-
and the one most trusted by Sudanese abroad-for
converting remittances, which provide one-third of
Sudan's foreign exchange earnings.
The new government's relationship with the IMF
will be tested as compliance with IMF-supported
reforms and the payment of arrearages conflict
with the regime's desire to ease economic hard-
ships. Problems with the Fund began in 1984, when
a standby agreement was suspended as a result of
Khartoum's failure to make repayments on sched-
ule. The confrontation with the IMF :also led to
suspension of IBRD~Consultative Group and Paris
Club reschedulings and, most important, a major
slowdown in disbursements of financial assistance
from most major donors. As a result, the Nimeiri
Secret
10 May 1985
regime agreed in March to adopt most of the
reforms suggested by the IMF. These included:
? A 48-percent official devaluation and adoption of
a floating bank rate of exchange.
? Adjustment of domestic prices to reflect the new
official exchange rate including a 66-percent
increase in gasoline prices and a 33-percent in-
crease in the price of bread.
Substantial tax increases and budgetary cuts.
Following adoption of these measures, the IMF
endorsed Khartoum's policies, with the proviso
that all arrearages be settled by the end of 1985.
This qualified endorsement set the stage for a
resumption of foreign assistance.
The major elements of the reform package are
intact, although the new regime has maintained the
rollback in bread, cooking oil, and soap prices made
in the final hours before Nimeiri's fall. The chair-
man of the Transitional Military Council has pub-
licly stated that the economic austerity program
would be kept in place. Nevertheless, there is
reason to doubt the willingness of the new economic
players to maintain the austerity program and
repay arrearages. The civilian interim Prime Min-
ister has publicly stated that Sudan's relationship
with the IMF would be "closely scrutinized." The
Finance Minister characterized the former govern-
ment as "the stooge of the IMF" and warned the
US Ambassador that pressure by the IMF and
other donors would be a mistake. Although formal
rejection of the austerity program is unlikely, the
new government may drag its feet and not adjust
prices sufficiently to reflect changes in exchange
rates and inflation. -It could also interfere with
commercial bank regulation of the floating rate of
exchange or refuse to ado t budgetary restraints
previously agreed upon.
Repayment of arrears to the IMF will remain the
most intractable problem. By the end of May,
Sudan will probably still owe $133.5 million to the
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Secret
ILLEGIB
IMF. The Sudanese'are-highly unlikely `to meet
these obligations , without-significantly increased
financial. aid. To use assistance currently allocated
for balance -of-payments' support to meet IMF-pay
ments would diniinish.the already tenuous 7pros7' '
pects for economic recovery. The Fund's flexibility
on rescheduling is severely .limited by its own
statutes, which prohibit any new program for a
member currently in. arrears. Nevertheless, the
IMF's forbearance on repayments, at least until the
new regime is better able to cope with the issue,
may prove critical in how Khartoum ultimately
handles: the arrearages problem.
Export Reforms Required
We believe additional reforms are needed to sustain
economic recovery. One area particularly in need of
change is cotton sales, which generate nearly half
of Sudan's export earnings but have been badly
depressed in recent years by the confusion and
corruption surrounding the marketing of the cotton
crop. The loss of earnings through such practices,
as well as sheer waste, (600,000 bales of cotton
from last year's crop remain rotting in warehouses)
is a major contributor to Sudan's current financial
difficulties. A marketing arrangement, similar to
the petroleum facility, would probably satisfy inter-
national cotton dealers and boost export earnings.
Finally, export disincentives would have to be
eliminated. Current policies stipulate that 100 per-
cent of export earnings be deposited in the Bank of
Sudan and exchanged at the relatively unfavorable
official rate. This rule has caused the government
to lose significant hard currency earnings as dealers
have either withheld supplies of exportable goods,
awaiting changes in the law, or smuggled them out
of the country.
Economic Prospects: The Political Dimension
Sudanese 'economic prospects beyond the next.six
months hinge to a large extent on settlement of the
insurgency in the south. Resolution of this conflict
would permit exploitation of oil resources that
would ease substantially the foreign exchange
shortages, and completion of the Jonglei canal
project that would increase the water available for
agriculture. Currently, both projects are suspended
because of security threats to the Western firms
involved.
The ideological preferences of the new government
leaders present further uncertainties. Although Is-
lamization of the banking system appears momen-
tarily to have lost its appeal, a resurgence of
Islamic legislation could further sour investor con-
fidence. Another factor is the new leadership's
perceptions about the role of government. Many of
the economic reforms enacted or contemplated
require a willingness to limit government controls
and to allow greater freedom for private-sector
initiatives. Unfortunately, despite privatization
rhetoric, the mind-set of most Sudanese leaders,
military and civilian alike, is probably more at-
tuned to greater central control of the economy.
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10 May 1985
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The Caribbean: Coping With
Prolonged Austerity
A significant improvement in the Caribbean area's
deep-seated economic slump is unlikely any time
soon. A number of Caribbean governments have
evinced in recent years a more rational approach to
economic decision making, but backsliding on
needed economic adjustments is likely as national
decisionmakers try to juggle the competing de-
mands of influential interest groups. Sporadic pro-
tests like those in the Dominican Republic, Jamai-
ca, and Haiti over the past year are likely to recur
there and possibly to emerge elsewhere. Growing
frustration with falling standards of living also
could give opposition groups-as well as Moscow
and its surrogates-new opportunities to broaden
their influence. In these circumstances, pleas for
US aid are increasingly likely.
The Caribbean area has posted no economic growth
since 1981. This is largely because the region's
main exports-bauxite, alumina, and agricultural
commodities-have been hurt by low world prices
and growing competition from alternate suppliers.
Caribbean oil refineries and transshipment termi-
nals also have lost business primarily because of
excess US refining capacity. Moreover, tourist
earnings have picked up only slightly. Although the
region's $7 billion external debt is minuscule by
Latin American standards, debt servicing has be-
come ever more burdensome for many Caribbean
countries. Unlike in earlier periods of economic
stress, the region's wealthier economies have been
unable to buoy the poorer ones by serving as local
markets, aid donors, and magnets for jobseekers.
Individual country's reactions to these trends have
been mixed. Jamaica, the Dominican Republic, and
The Caribbean: Real Pricese of Major Exports,
1974-84
Dollars per barrel
Cents per pound
50 10 Aluminum
I i l Il Sugar
0 0 1974-79 80 81 82 83 84
Haiti-where 80 percent of the region's population
lives-turned to the IMF for help. US Embassy
reporting shows that these countries have improved
tax collection, trimmed and redirected the bloated
public sector toward more productive investments,
raised interest rates to encourage domestic savings,
and stimulated the search for foreign investment.
Nevertheless, the failure of potential international
commercial lenders to respond adequately to the
IMF lead has undermined economic revitalization.
Other countries in the region have cast about for 25X1
different solutions, probably hoping to avoid imple-
menting harsher austerity measures.
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 The Caribbean: Weighted Average Real GDP
Growth and Inflation, 1974-84'
The Caribbean: GDP by Major
Contributor, 1981
Tobago
a Excludes smallest islands for which data are incomplete.
b GDP growth in 1983 and 1984 was zero.
With or without IMF-supported programs, pro-
tracted austerity has cost several Caribbean gov-
ernments a good deal of political capital. Public
discontent over austerity has triggered violent pro-
tests in Jamaica and the Dominican Republic and
has driven support for their leaders to record lows.
The pervasive stagnation has further undermined
the government-to-government cooperation needed
for areawide economic solutions.
We see little or no improvement in the region's
economic conditions over the next several years:
? World demand for Caribbean bauxite and its
derivatives will continue to deteriorate in the face
of such low-cost substitutes as ceramics and
plastics.
? Demand for Caribbean sugar, coffee, and ba-
nanas will remain weak because of a world
oversupply, and, in the case of coffee, better
quality available from other producers.
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? The depressed world oil market will encourage
US firms to close unprofitable Caribbean oil
operations.
? Any gains from tourism will be unevenly distrib-
uted and unlikely to match the boom levels of the
early 1970s
Against this backdrop, the process of economic
adjustment will not be easy.. Long-term measures-
such as moving away from traditional exports,
raising domestic interest rates, cutting consumer
subsidies, and streamlining bureaucracies-will
compound domestic hardships over the short run.
Moreover, there are no guarantees that such aus-
terity measures would revitalize the region's econo-
mies. Although long-term growth-generating poli-
cies would help attract financing and technical
expertise, especially under the Caribbean Basin
Initiative (CBI), recovery hinges on finding new
markets abroad.
Considering these uncertainties, we believe that the
immediate costs of adjustments will lead national
decisionmakers to back away from these needed
reforms. Popular resistance to tougher austerity
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measures in a number of Caribbean countries only
underscores this concern. At best, we believe gov-
ernments already under various stages of IMF
adjustment programs will try to maintain reform
efforts wherever possible; nonetheless, they, and
those countries without IMF programs, are unlike-
ly to institute strong new policy measures.
Even if there are temporary problems, we doubt
that Jamaica, the Dominican Republic, and Haiti
will abandon IMF-supported programs altogether.
In our opinion, their leaders understand that no
single Caribbean economy is large enough or diver-
sified enough to spur economic recovery alone, and
that, without a workable IMF program, other
international lenders would be unlikely to offer
more than token help.
Unaccustomed to hard times, the oil-dependent
economies of The Bahamas, Trinidad and Tobago,
and the Netherlands Antilles will continue to delay
slashing imports and government spending because
they are unwilling to risk the political backlash.
Barring an unexpected pickup in the world oil
market, such foot-dragging will eventually require
even more onerous adjustments.
Other countries face intractable problems. We
believe the leaders of Suriname and Guyana will
continue to resist efforts to revamp their economies
to avoid jeopardizing the perquisites of the military
and other key interest groups, thereby precluding
IMF accords. In Grenada, the government will
have to deal quickly with the island's 30-percent
unemployment rate and deteriorated infrastructure
that is discouraging investors. Other smaller econo-
mies such as St. Christopher and Nevis, and St.
Vincent and The Grenadines, even with successful
policy reforms, are not viable without indefinite
infusions of aid.
The political climate will make economic policy
changes more difficult in the coming months. In
addition to setting back adjustments, bickering
among ruling party leaders, alienation of key inter-
est groups, and the growing influence of opposition
parties could touch off disruptive incidents in sever-
al countries. Differences among governing elites
over economic policy, in the extreme, could turn
economic crises into political ones. This is largely
because the highly personalistic nature of Caribbe-
an politics has resulted in fragile intraparty cohe-
sion. Consequently, we expect most elites, in chart- 25X1
ing economic strategy, to take directly into account
the need to preserve party harmony even if it means
undercutting sound economic policies.
Meanwhile, continued economic woes are likely to
cause important interest groups, particularly orga-
nized labor, to step up resistance to belt-tightening.
Recent sporadic strikes and demonstrations in the
major Caribbean countries underscore labor's reac-
tion to policies perceived as detrimental to its 25X1
interests. Moreover, support from the middle class
and the business community appears to be flagging
as these groups become increasingly frustrated with
the fall in living standards
Opposition parties, although tarred in a number of
countries by their poor economic policies when they
were in power, are likely to gain as dissatisfaction
over austerity grows. Moderate parties, especially 25X1
those in the English-speaking Caribbean, appear
best positioned to take advantage of mounting
popular discontent. Leftist parties are struggling to
expand their popular appeal, but so far only the
leftist-dominated coalition in Dominica appears
capable of mounting a strong challenge in coming
Coping With Threats
We believe that growing economic problems will
increase the chances for violence, especially if
decisionmakers inadequately prepare public sup- 25X1
port for austerity measures. The ability of Caribbe-
an security forces to handle domestic unrest, how-
ever, varies widely. Although security forces
throughout the region probably can control sporad-
ic disturbances, widespread violence could quickly
overwhelm military capabilities even in larger
countries
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Over the years, the United States, the principal
economic actor in the region, has assumed an ever
larger role as former European colonial powers have
attempted to reduce their economic support to the
region:
? The United States is the Caribbean's largest trad-
ing partner. In 1983 the United States bought more
than 80 percent of total Caribbean exports to the
West, purchasing the lion's share offoodstuffs
(including coffee, cocoa, and sugar), manufactures
(including chemicals, light machinery, and consum-
er goods), raw materials (especially metals), and
petroleum products. The United States also provid-
ed more than 50 percent of Caribbean imports from
the West, primarily raw materials and fuel.
? Net US direct investment totaled about $2 billion
in 1983. Most US equity is centered in the petro-
leum and bauxite and alumina industries and is
dominated by several large US corporations- Tex-
aco, Exxon, Reynolds Metals, and Alcoa, among
others.
? US commercial bank exposure stood at $3.5 billion
at the end of 1983, including US balances at
offshore banking centers in The Bahamas, Bermu-
da, British Virgin Islands, and the Netherlands
Antilles. Even excluding these balances, the United
States still accounted for more than 35 percent of
commercial bank loan balances in the region.
? Of the $485 million in OECD commitments of
official development aid to the region in 1982, the
latest year for which complete data are available,
the United States accounted for 55 percent of the
total. Washington contributed more than 80 percent
of aid committed to the Dominican Republic, 72
percent to Jamaica, and 48 percent to Haiti. More-
over, the United States, as a major contributor to
the IMF, the World Bank, and the Inter-American
Development Bank, also has been a significant
source of multilateral support.
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10 May 1985
The situation presents some potential for exploita-
tion by Moscow and its allies. In addition to
providing funds, training, and political guidance to
a wide variety of leftist groups, Cuba and the
USSR are trying to strengthen ties with the leftist-
leaning regimes of Guyana and Suriname. They
apparently view Guyana as the best available hope
for rebuilding their position in the area in the wake
of the Grenada debacle. Reflecting their narrowed
political options and realization of labor's strong
clout in the region, the Soviets and Cubans are
stepping up efforts to improve ties with trade
unionists. They also are trying to improve relations
with some pro-Western countries through trade
and cultural contacts.
As part of Libyan leader Qadhafi's broad efforts to
undermine US influence, Tripoli is pursuing a more
active campaign in the Caribbean. Unlike the
Cubans and Soviets, Libya is trying to prod leftists,
particularly in the French Antilles, into more con-
frontational tactics. Tripoli's leverage over most
Caribbean leftists appears limited, however, and we
believe leftists will continue to resist radical tactics
because of their concern over public rejection and,
in some cases, fear of government retaliation.
The Caribbean area's grim economic prospects and
the pressures such conditions are putting on region-
al governments portend increased pleas for help
from Washington. We believe many area leaders
who back the CBI-particularly Jamaica's Prime
Minister Seaga-will be watching its progress as a
barometer of the US commitment to the region. In
addition to increasingly urgent requests for conces-
sional economic aid, additional bauxite purchases,
-and increased security assistance, we judge that
Caribbean governments will ask Washington to
take a larger hand in prodding the IMF, aid
donors, and commercial banks to make new fund-
ing available and to deter any substantial US
disinvestment in the region.
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As economic troubles in the region persist, illegal
migration to the United States is likely to pick up,
especially from Haiti. Narcotics-related activities
also will increase and spread to new areas. In these
circumstances, we believe tensions between Wash-
ington and many Caribbean nations will increase
even though their governments generally will re-
main pro-US.
In the unlikely event that the region's economic
difficulties lead to widespread political instability,
the chances for the emergence of leftist regimes
opposed to Washington and its policies would grow.
US and other foreign-owned firms might become
targets for nationalization, and the Soviets and
their surrogates would have new bases for regional
adventurism. The failure of the small English-
speaking islands to form a quick-reaction security
force raises the chances that Washington might be
called on to help prevent another leftist takeover.
11 Secret
10 May 1985
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Zimbabwe: Delaying ough
Despite the lingering effects of its recent drought,
Zimbabwe probably will register about 3 percent
real growth in 1985 following three years of declin-
ing GDP. Economic optimism has grown with the
return of normal rainfall, although Harare still
faces several difficult choices between policies
needed to sustain the economic recovery and a
commitment to redistribute national wealth. Prime
Minister Mugabe appears determined to impose his
vision of African socialism, but probably is realistic
enough to backtrack temporarily to secure a new
IMF agreement and to shore up Zimbabwe's fi-
nances. In any case, he is likely to delay tough
economic choices until after the national elections
scheduled for this June.
Socialism in Theory and Practice
Three years of declining GDP have led Mugabe to
move cautiously on his socialist program, but his
past efforts have added to Zimbabwe's economic
strains. After becoming prime minister in 1980,
Mugabe publicly committed his government to a
massive resettlement program-which now calls for
moving 162,000 black peasant families onto under-
utilized land by the end of 1985. At the same time,
Zimbabwe has maintained a favorable economic
environment for commercial farming. The govern-
ment has improved infrastructure and incentives
for small-scale, mainly black farmers without dam-
aging those available to large white-owned com-
mercial farms. Producer prices have been raised
substantially; the price of corn, for example, more
than doubled. Mugabe also pledged an increased
government role in the economy, promising greatly
expanded educational opportunities, health care,
and other social services for blacks. The number of
primary school students has doubled since
independence, and low-income families now receive
free health care. Firms must operate under regula-
tions that limit their ability to fire workers, set
their prices, and control their access to foreign
At independence in 1980, Zimbabwe inherited both
considerable economic potential and the problems
typical of developing nations. The country pos-
sesses significant mineral wealth-including
chrome, asbestos, copper, gold, and coal-and a
robust agricultural sector that exports beef, corn,
cotton, and tobacco, and, in years of normal
rainfall, meets domestic needs for nearly all food
crops. As Rhodesia, the country diversified manu-
facturing and food production under the impetus of 25X1
UN sanctions that partially isolated it from inter-
national trade from 1965 to 1979. As a result,
Zimbabwe's exports are broadly based, with no
single commodity accounting for more than one-
fifth of export earnings in a typical year.
Rhodesian agricultural policies and institutions,
however, favored the interests of the country's
5,000 to 6,000 white commercial farmers-who
produced three-fourths of the farm output-over
the nearly 700,000 black farmers. As a result,
Zimbabwe's black rural sector is largely undevel- 25X1
oped at a time when the country's population is
growing at a rapid 3 -Percent annual rate.
exchange. New parastatals have been established
for oil procurement and minerals marketing, and
the government has purchased controlling interest
in several major mining, banking, and pharmaceu-
tical firms. The management of these companies
has been left in private hands, however, and Zim-
babwe has avoided outright nationalization or ma-
jor encroachments on private property.F____1 25X1
This ambitious agenda received an initial boost
from the lifting of economic sanctions and an influx
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Zimbabawe: Selected Economic Indicators, 1980-84
Foreign Exchange Allocated to
Industry
of foreign loans and aid, and real annual GDP
growth rates exceeded 10 percent in 1980 and
1981. More recently, however, drought and higher
costs for agricultural inputs, coupled with low
world prices for Zimbabwe's mineral exports, have
reduced GDP.
Moreover, public spending has grown rapidly-
from 35 percent of GDP in 1980 to about 45
percent today-and heavy borrowing has pushed
the ratio of debt service to export earnings to over
30 percent. Socialist rhetoric by Mugabe and other
government officials also has been costly, accelerat-
ing the exodus of white managers, skilled workers,
and commercial farmers, a major drain of technical
expertise. Finally, the rapid growth of budget defi-
cits and the suspension of dividend and profit
remittances in 1984 to conserve scarce foreign
exchange led to the collapse last year of Zimbab-
we's most recent IMF standby agreement.
Secret
10 May 1985
Zimbabwe: Agricultural Export
Earnings, 1980-84
Million US $
Total
386 547 463
419
472
Tobacco
179 309 248
224
280
Cotton
89 87 68
73
94
Meat
21 7 6
11
39
Sugar
74 80 69
52
41
Coffee
11 14 19
19
18
Corn
12 50 53
40
0
Percent of
total exports
27 39 36
37
39
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Current account balance
-0.64
-0.71
-0.46
-0.05
Trade balance
-0.07
-0.15
0.09
-0.20
Exports, f.o.b.
1.41
1.28
1.14
-1.20
Imports, f.o.b.
1.48
1.43
1.05
-1.00
Net services and transfers
-0.57
-0.56
-0.55
-0.27
Capital account balance
0.49
0.60
0.25
a Estimated.
Mugabe faces competing demands of laying the
groundwork for a sustained economic recovery and
making progress toward socialism. Zimbabwe must
first secure additional foreign exchange to ensure
sustained. growth. Foreign exchange allocations to
industry-slashed by half between 1981 and
1983-probably. have to be restored to enable firms
to secure inputs and replace aging machinery.
Zimbabwe needs a new IMFagreement to ease its
foreign exchange crunch but are reluctant to im-
pose the cutbacks that this would entail
the IMF repeatedly
has told Harare that, to secure a new standby
agreement, it must cut spending on health, educa-
tion, and defense.
New foreign investment would facilitate more rap-
id export growth, but the suspension of dividend
and profit remittances last year-although reduc-
ing Zimbabwe's current account deficit-has fur-
ther damaged investor confidence. Although we
believe that the IMF will push Harare to rescind
this suspension, securing new foreign investment
probably will require clear guarantees on profit
repatriation and nationalization. Moreover, Zimba-
bwe needs to reduce the regulatory burden to
improve the investment climate.
We believe Harare also must reassure its commer-
cial farmers that their position is secure in the face
of government proposals for restructuring the agri-
cultural sector. The US Embassy reports that a
new land acquisition bill reducing property rights
probably will come before Parliament this summer. 25X1
Commercial farmers are concerned over recent 25X1
efforts to nationalize grain milling and over govern-
ment attempts to speed the lagging resettlement
program, which to date has moved only about
35,000 families.
25X1
Zimbabwe is scheduled to hold elections in June,
and until then nearly all major economic decisions
will be put on hold. Mugabe and his party, in our
judgment, are determined to consolidate their polit-
ical position by obtaining a sweeping electoral
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victory that can be portrayed as a popular mandate
advancing its goal of creating a one-party state. As
the elections approach, the government has tried to
moderate its radical image
to appeal to the rural populace and
business community. A component of this cam-
paign_strategy has been to deemphasize the impor-
tance of socialism and the one-party state,
Zimbabwe's economy should rebound this year
largely on the strength of better agricultural per-
formance and a renewal of IMF funding. Improved
corn yields because of better weather are expected
to.provide a surplus for export of 200,000 to
500,000 tons, compared with imports of more than
250,000 tons for 1984. We expect Harare to reach
accommodation with the IMF after the elections by
agreeing to cut social spending and resume the
remittance of dividends and profits.
Zimbabwe's long-term economic prospects are
somewhat cloudier. We believe that Mugabe re-
mains committed to transforming Zimbabwe into
an egalitarian society dominated by his party and
that his moderation has been largely tactical. The
architect of Zimbabwe's pragmatic economic poli-
cies, Finance Minister Chidzero, reportedly may
leave his government post-mainly for personal
reasons-after the elections. The loss of Chidzero
could prove a major setback for proponents of
gradual reform and a victory for more radical
elements of the government, including the Prime
Minister himself.
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Saudi Arabia: Expatriate Laborers
There To Stay
Riyadh's efforts to limit the number of expatriates
in the country have met with only limited success.
The economic downturn as a result of declining oil
revenues is causing a shift in the composition and
sectoral employment of foreign workers, but their
number is still high. Many Saudis worry that the
3.5 million foreigners employed in their country
threaten their Islamic society. Nonetheless, Saudi
Arabia will continue to rely on expatriates for
about half its work force into the next decade
because their presence is essential to the country's
economic growth and productivity.
A More and More Expatriates
The large demand for labor generated by spectacu-
lar economic growth during the 1970s has contin-
ued to overwhelm Saudi Arabia's indigenous labor
supply. The Saudi labor force at best can fill only
half of the current positions in the Kingdom, and
most Saudis lack the requisite training for many of
the newly created jobs. Riyadh, therefore, depends
on foreign workers to supply the labor needed for
the large infrastructure projects and for the petro-
leum, construction, services, manufacturing, and
professional and managerial sectors.
The heavy influx of foreign workers has been a
mixed blessing. According to the Embassy, many
Saudis resent the behavior of expatriates and see
them as contaminating Saudi culture and society.
Islamic fundamentalists have expressed concern
that foreigners, especially non-Muslims, threaten
the Islamic foundation of the state. Moreover, the
Saudi Government has been concerned about the
expatriate community's potential for subversion.
Riyadh has responded to these concerns by adopt-
ing Saudi-ization measures. The government termi-
nated the contracts of 10 percent of all expatriate
employees working for the government in January
1984. Work permits for foreign workers became
more difficult to obtain and were transferable only
after payment of an exhorbitant sum. Last January
the government began enforcing a largely ignored
1969 law that required the Ministry of Labor to
certify that no Saudi national was available before
a job could be offered to a foreigner. In addition, 25X1
enforcement of strict social and religious restric-
tions has increased. 25X1
Despite these efforts and the economic slowdown
caused by declining oil revenues, the total number
of foreign workers has not dropped, and, in fact,
has continued to rise, albeit at a slower rate.
According to US Embassy estimates, expatriates
comprised more than 70 percent of the work force
at the end of 1984, compared with 67 percent in
1982. The increase in expatriate laborers arises
from the continued growth of the Saudi economy,
which, although estimated at only 4.3 percent last
year-less than the 1980 rate-still requires an
inflow of new workers. Much of the recent growth
of the foreign labor force has been in unskilled and
semiskilled workers from North Yemen, Bangla-
desh, Sudan, Indonesia, and Sri Lanka. These poor
countries provide a ready supply of workers willing 25X1
to perform jobs considered beneath the average
Saudi. 25X1
At the same time, the Saudis have not been able to
reduce significantly the number of expatriates who
hold skilled jobs, such as Westerners in technical
and managerial positions, Pakistani units in the
military, or Egyptians in teaching jobs. Although
the number of highly educated Saudis is growing-
nearly 75,000 Saudis now are studying in the
Kingdom's seven universities and abroad-there 25X1
are still severe shortages, and most newly educated
Saudis lack the practical experience to replace
seasoned professionals. The economic slump, how-
ever, has hurt some expatriate communities. As
large infrastructure projects were completed, scaled
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Saudi Arabia: Foreign Labor,
1975 and 1980-84a
Saudi Arabia:
Current Account, 1982-84
Oil 72.6 44.8 38.4
Nonoil 0.2 0.4 0.9
Imports, f.o.b. 39.0 38.0 35.0
Services and private transfers -21.0 -21.3 -16.7
Freight and insurance, net -7.0 -6.8 -6.3
Investment income 16.0 14.5 12.9
Worker remittances -5.0 -5.0 -4.7
Other service payments, net -25.0 -24.0 -18.6
Grants -5.3 -2.0 -2.0
Current account 7.5 -16.1 -14.4
Official foreign assets at yearend b 135.0 120.0 105.0
Estimated.
b Excludes loans to Iraq.
back, or postponed, the demand for foreign workers
in the construction sector-which had employed 58
Dercent of all expatriate laborers-has declined.
In some cases, workers displaced in one sector have
moved into another. The decline in the number of
Filipinos in the construction sector, for example,
has been partially offset by an increase in their
numbers in the operations and maintenance, manu-
facturing, and service sectors. The Saudi drive
toward self-sufficiency in agriculture also has en-
couraged some displaced foreigners to seek work as
farm laborers.
Impact on the Sending Countries
Changing Saudi labor requirements are having an
uneven impact on the labor exporting countries. In
addition to cutbacks in projects requiring foreign
workers, Riyadh is attempting to replace workers
Secret
10 May 1985
from countries with higher wage scales with work-
ers from lower-wage countries:
? Pakistani workers have been hit hard. Although
as many as 500,000 Pakistani workers remain in
Saudi Arabia, in 1984 nearly 70,000 Pakistani
workers left Saudi Arabia and another 10,000
may have left already this year. Also, many
Pakistanis who remained had to renegotiate con-
tracts for lower wages and benefits.
? Saudi Arabia has been the largest overseas mar-
ket for South Korean construction firms during
the past decade. Because of recent cutbacks in
construction projects, the US Embassy in Riyadh
projects that Korean workers, who numbered
140,000 in 1983 are expected to decline to 60,000
by 1986.
? Even skilled US workers in the oil sector have
been affected. The trend is to replace US workers
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Thousand
Persons
Share of Total
Expatriate Labor
Force (percent)
3,500
100
Yemen Arab Republic
800
24
Pakistan
500
14
Egypt
428
12
Philippines
400
11
India
230
7
Sudan
158
5
Turkey
130
4
Jordanb
120
3
South Korea
104
3
Thailand
100
3
Syria
90
3
Bangladesh
50
1
Somalia
50
1
Indonesia
47
1
Lebanon
47
1
Sri Lanka
45
1
Ethiopia
45
1
United States
42
1
United Kingdom
25
1
Other
89
3
a Estimated.
b Including Palestinians.
with British and other Western personnel who are
willing to work for lower pay, travel without
families, and have lower transportation costs.
According to the US Consulate in Dhahran, the
number of US workers and dependents in the
Eastern Province fell by 5,000 in 1983-84.
Bangladesh, Sri Lanka, and India-generally
lower-wage countries-have benefited:
+ The number of Bangladeshi workers going to
Saudi Arabia increased from about 6,500 in 1979
to over 15,000 per year for the first half of 1984.
Worker remittances from all Bangladeshi abroad
were $592 million in FY 1983/84.
? The US Embassy in Colombo believes the num-
ber of Sri Lankan workers going to Saudi Arabia
considerably exceeds the official estimate of
25,000 per year. Worker remittances from all Sri
Lankans abroad were $290 million in 1983 and
were second only to tea as a source of foreign
exchange.
? India, despite limited success recently in winning
construction and building maintenance contracts,
still had 230,000 workers in Saudi Arabia in
1984. The numbers are small relative to the total
Indian labor force but worker remittances are
important for a few regions and provide New
Delhi substantial foreign exchange earnings.
25X1
Although worker remittances provide an important
source of foreign exchange earnings and employ-
ment for many LDCs, the impact of returning
workers from Saudi Arabia has probably been
limited thus far. Pakistan, for example, has blamed
declining worker remittances as the major factor in
the scrapping of its five-year plan and the subse-
quent lower projection of economic growth. Saudi
losses undoubtedly contributed but domestic bank-
ing and exchange rate policies and the strength of
the dollar also hurt total remittances. The effect of
returnees on, domestic unemployment in these
countries is also muted because the numbers are
small compared with the total work force. More- 25X1
over, the returnees typically have accumulated
savings that ameliorate their economic and social
problemsF---] 25X1
In the near term, declining oil revenues and
Riyadh's continuing efforts toward Saudi-ization
will merely serve to hold down the size of the
expatriate labor force. Nevertheless, Saudi Arabia
will continue to rely on large numbeis of foreign
workers to support the country's recently achieved
high standard of living. For 1985 most expatriate
job losses will result from the completion or cancel-
lation of construction projects. 25X1
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Although the Fourth Five-Year Plan (1985-89)
includes a. commitment to reduce expatriate work-
ers by more than half a million, we judge Riyadh
realizes it cannot meet this goal. Saudi-ization
cannot proceed as quickly as Riyadh would like
because productivity would suffer in those institu-
tions-such as the government and ARAMCO-
where newly educated Saudis seek work. Moreover,
there simply will not be enough Saudis completing
degrees in higher education to fill the demand for
technical and managerial positions.
The long-term prospects for Saudi-ization are
somewhat better. Nearly 60 percent of the Saudi
population is under 16, and many will be seeking
jobs in the decade. In addition, Riyadh's efforts to
develop education opportunities will eventually
reap benefits. Although efforts to encourage private
industry to use more capital-intensive methods of
production have had limited success to date, such
capital-intensive industries as petrochemicals or
refineries hold some promise of reducing the de-
mand for foreign labor.
Saudi Arabia will continue to be vigilant for evi-
dence of subversive threats by the expatriate com-
munity. Of most concern are the 100,000 Palestin-
ians,.and Muslim fundamentalists-especially
Shia-from other countries. Still, the Embassy
believes there is no effective cooperation between
expatriate workers and domestic dissidents, and
expatriates acting alone appear unable to threaten
the regime.
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enezuela Fears US
Oil import
Restrictions
Energy
ing debt service payments if oil export earnings fall sharply.
groups would urge retaliation against US goods and, at the extreme, restrict-
Proposals by US refiners for US limits on oil imports are raising fears in
Venezuela about protectionism and starting talk of retaliation. Venezuela is
the second-largest supplier of oil to the United States, and, according to the
US Embassy, there is growing concern in Caracas over the potential, of higher
US tariffs and quotas to cut its oil revenue-80 percent of product exports go
to the United States. The Lusinchi administration, already upset by the
prospect of quotas and countervailing duties on steel, believes that any
restrictions on oil products would harm its ability to repay debt and finance
capital goods imports. some influential Venezuelan
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Syr' n Oil . A Syrian delegation will travel to Iran soon to try to work out a new oil agree-
D velopments ment to replace the one that ended last month. Iran probably will again
provide 20,000 b/d of free oil and 120,000 b/d at discounted prices. The
negotiations are likely to be difficult because of Syrian delays in paying for last
year's oil. In addition, Syria is scheduled to start paying $20 million per month
on 31 May for postponed oil debts from the 1983-84 contract. To ease their fi-
nancial problems, the Syrians are trying to have the free oil shipped
immediately, but the Iranians insist that the agreement first be approved by
their Consultive Assembly where it will probably face problems.
Domestically, Syria recently signed an agreement forming a joint-venture, Al
Furat Petroleum, that will be responsible for production at the newly
discovered Thayyem field. Syria will hold 51 percent of the company, with its
foreign partners-Shell USA, Shell International, and Deminex-holding the
remainder. This opens the way for the construction of a pipeline from the (field
and commercial oil sales.