SOUTH AFRICA: ECONOMIC REALITIES AND POLITICAL CHOICES

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85S00317R000300100004-3
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 16
• Document Creation Date: December 21, 2016
• Document Release Date: February 4, 2009
• Sequence Number: 4
• Publication Date: December 1, 1984
• Content Type: REPORT

Approved For Release 2009/02/04: CIA-RDP85SO0317R000300100004-3
Directorate of Confidential
Intelligence
1
South Africa:
Economic Realities and
Political Choices
Confidential
ALA 84-10116
December 1984
Copy 3 2 9
Approved For Release 2009/02/04: CIA-RDP85SO0317R000300100004-3
 Approved For Release 2009/02/04: CIA-RDP85SO0317R000300100004-3
Approved For Release 2009/02/04: CIA-RDP85SO0317R000300100004-3
 Approved For Release 2009/02/04: CIA-RDP85SO0317R000300100004-3
fE,,ff Directorate of Confidential
% Intelligence
Political Choices
South Africa:
Economic Realities and
Chief, Southern Africa Division, ALA
This paper was prepared by pffice of
African and Latin American Analysis. Comments and
queries are welcome and may be directed to the
Confidential
ALA 84-10116
December 1984
25X1
25X1
Approved For Release 2009/02/04: CIA-RDP85SO0317R000300100004-3
 Approved For Release 2009/02/04: CIA-RDP85SO0317R000300100004-3
Confidential
South Africa:
Economic Realities and
Political ChoicesF
five years.
Key Judgments South Africa's economic performance, in our judgment, will limit the pace
Information available of Pretoria's racial reform process. Nonetheless, Pretoria must sustain the
as of1 November 1984 momentum of reform if the new constitution granting limited political
was used in this report.
rights to Coloreds and Indians is to gain legitimacy among these nonwhite
minorities. Moreover, we believe that, in order to satisfy the demands of
Colored and Indian representatives, the government must also improve
conditions for the black majority. The leader of the majority Colored party
has already threatened that his party will pull out of the new system unless
substantial new reforms that benefit all nonwhites are instituted in the next
The economy is ill poised to shoulder the financial burden associated with
major new programs for the nonwhite population in general, including
blacks. Economic austerity measures imposed during 1984 to reduce a
large current account deficit, as well as a persistent 12-percent inflation
rate, will limit real economic growth to about 2 to 3 percent in 1985, in our
judgment. Growth could be even lower if the price of gold falls, if the
three-year drought continues through this growing season, or if the world
economic recovery grinds to a halt. Moreover, we believe that South
Africa's average annual rate of real economic growth during the remainder
of this decade will be no more than 3 percent, and will continue to inhibit
programs for nonwhites.
For their part, whites, already hit hard by inflation, recent tax hikes, and
credit restrictions, are likely to be unwilling to foot the bill for costly racial
reforms that would erode their privileged position. Even a speculative surge
in gold prices would be unlikely, in our view, to induce the Botha
government to enact massive new spending programs for nonwhites, largely
because Pretoria would not want to be saddled with the added burden
during subsequent economic downturns. Moreover, we believe that if
economic conditions deteriorate severely-which we consider possible but
not probable-Pretoria would move to protect the interests of whites at the
expense of nonwhites.
Confidential
ALA 84-10116
December 1984
- -- - - - - Approved For Release 2009/02/04: CIA-RDP85SO0317R000300100004-3
 Approved For Release 2009/02/04: CIA-RDP85S00317R000300100004-3
We believe that Pretoria will move on reforms that do not cost very much
but are designed to have symbolic value to nonwhites, such as ending the
ban on interracial marriages and relaxing job, business, and residency
restrictions for all nonwhites. Such reforms also would reflect a new,
implicit recognition by Pretoria that a large and settled urban black
population is a permanent fixture in South Africa. Although the govern-
ment's reform program in the near term will not improve the lives of blacks
living in white areas enough to avoid periodic flareups of black unrest, it
may be enough to maintain the participation of Colored and Indian
members of parliament who will have a vested interest in the new political
dispensation.
The effect of South Africa's mediocre economic prospects on US interests
in southern Africa would probably be mixed. Slow economic growth in
South Africa would compound the economic difficulties of Pretoria's
neighbors and would lead them to look to the West-including the United
States-for additional economic aid. Botswana, Lesotho, Swaziland, and
Zimbabwe are especially dependent on South Africa as a market for their
products and a source of employment.
On the other hand, budgetary constraints have made Pretoria sensitive to
the economic drain of maintaining its control over Namibia. While we do
not believe that financial considerations alone would determine South
Africa's attitude toward a possible Namibian settlement, the increasing
cost of Namibia probably will reinforce US peace initiatives in the region.
Aside from Namibia, we do not expect that South Africa's economic
troubles will give Washington much leverage over Pretoria's domestic or
foreign policies. South Africa most likely will continue to plead for
patience for its gradualist approach to racial reform, citing among other
factors the economic constraints on the reform process. In the event of a
serious economic decline, however, Pretoria may implicitly ask Washington
to acknowledge its cautious reform policies by assenting to another IMF
standby loan-this would provide Washington with some new leverage.
- Approved For Release 2009/02/04: CIA-RDP85S00317R000300100004-3
 Approved For Release 2009/02/04: CIA-RDP85S00317R000300100004-3
Confidential
Economic Prospects for 1985 and Beyond 1
The Costs of Reform 6
Outlook 6
Approved For Release 2009/02/04: CIA-RDP85S00317R000300100004-3
 Approved For Release 2009/02/04: CIA-RDP85SO0317R000300100004-3
Figure 1
South Africa's Black Homelands and Industrial Areas
M adlkpadi
pansl
amibla
South
Atlantic
Ocean
Botswana
D
Kimberley
Bloemfontei
I oPhuth/ttiwana
Pert Elizabeth-
Uitenhag
Approved For Release 2009/02/04: CIA-RDP85SO0317R000300100004-3
iet~?
1' u A
East London
East London
/Durban
Durban-
Pinetawn
"Independent" black homeland
Black homeland
Major corn-growing region
Major industrial area
Chromium Mining Au Gold
Coal Mn Manganese
Diamonds Pt Platinum
Iron U Uranium
200 Kilometers
v
L1 4"
`S azitand
 Approved For Release 2009/02/04: CIA-RDP85SO0317R000300100004-3
Confidential
South Africa:
Economic Realities and
Political Choices
The recent outbreak of violence in black townships
that coincided with the implementation of South
Africa's new constitution, as well as the splits within
the Colored and Indian communities over the new
multiracial political system, has lent urgency to the
government's efforts to gain legitimacy for the new
constitution among these nonwhite minorities. The
state of the economy is an important limiting factor
on how far the government can move on reforms that
the white electorate may perceive as a threat to white
control and privilege. This paper assesses South Afri-
ca's economic prospects and the linkage between its
economic health and the likely direction that Presi-
dent Botha's reform process will take.'
As it had in the past, Pretoria reacted to the recent
current account deficit-as well as continued high
inflation and a fall in the exchange value of the
rand-by ratcheting down the economy. Banks boost-
ed the prime lending rate from 20 percent in January
1984 to 25 percent in August. Pretoria increased the
general sales tax from 6 to 7 percent in January, and
to 10 percent in July. Credit restrictions also were
tightened in August. Government policies were mixed,
however, as a seemingly nonexpansionary budget pre-
sented last March has been largely undermined by
spending that has run well above planned amounts.
The economic downturn began in March as consum-
ers apparently realized that the hoped-for sustained
economic recovery was not in the offing. Retail sales
slumped to 15 to 20 percent below business expecta-
tions in early September, according to press reports.
In addition, the low exchange value of the rand fueled
inflation, which has climbed back to an annual rate of
South Africa's economy is buffeted by the wild swings
of world gold prices and the government's attempts to
keep current account deficits within manageable
bounds. In the past five years, the price of gold, which
accounts for some 40 percent of South Africa's for-
eign earnings, has ranged from under $300 per ounce
to over $600. During the same period, annual real
economic "growth" has ranged from a negative 3
percent to a positive 7 percent (see figure, 2). The
record shows that Pretoria has not been particularly
successful in balancing the surge in growth and
imports that follows a gold price upturn against the
inevitable current account deficits that follow a price
decline (see table). Most recently, the government has
struggled with a current account deficit that, in our
view, was caused by Pretoria's unfulfilled expecta-
tions of higher gold prices and an end to the southern
African drought, and by debt-financed consumer pur-
chases.Z
12 percent after slowing somewhat in late 1983
Based on the sketchy data available-and on esti-
mates by private US and South African economic
forecasters-we believe that real growth for South
Africa will be only about 1.5 percent in 1984. The
current account deficit-that had been running at a
seasonally adjusted, annual rate of $2.2 billion in the
first quarter of 1984-probably will total nearly $1
billion for the entire year
Economic Prospects for 1985 and Beyond
End of the Downturn?
In our view, the South African economy is set to turn
around next year. Assuming an average gold price of
$370 per ounce, growth of export demand of about 3
25X1
25X1
Approved For Release 2009/02/04: CIA-RDP85SO0317R000300100004-3
 Approved For Release 2009/02/04: CIA-RDP85SO0317R000300100004-3
South Africa: Riding an
Economic Rollercoaster
The South African economy is influenced to a large
extent by factors that Pretoria cannot control: the
price of gold, world economic conditions, and the
amount of rainfall in South Africa's corn-growing
region. Beginning in 1979, South Africa enjoyed a
period of robust economic growth that was fueled by
an unprecedented jump in the world price of gold.
The increase from an average of less than $200 per
ounce in 1978 to more than $600 in 1980 produced
record current account surpluses that averaged $3.5
billion in 1979 and 1980, and real economic growth
of 7.3 percent in 1980.
The Contraction of 1981-83
South African consumers bumped into limits on their
ability to borrow, and began to reduce their spending
by early 1981. This slowdown in private consumption
triggered an economic downturn that was amplified
by a plunge in world gold prices and the onset of
recession in the United States and other Western
countries. Gold prices slid steadily from an average
of $560 an ounce in January 1981 to just $400 by the
end of that year, cutting 1981 gold sales by $3.5
billion. Nongold exports dropped 12 percent in re-
sponse to the recession in the West.
Pretoria responded to the prospect of rising current
account deficits by boosting domestic interest rates in
an effort to slow the economy further and reduce
imports. South Africa was forced to cover a record
current account deficit of $4.6 billion in 1981 and
another $3.0 billion in 1982. It increased short-term
borrowing from West European banks and drew
percent, and a normal corn harvest,' we project that
Pretoria will be able to relax its economic restraints
enough to allow 2- to 3-percent real growth in 1985
while generating a small current account surplus.'
' Past drought cycles suggest that three years of serious drought
may be followed by several years of mild drought, but the limited
'Some private US economic forecasters have projected a 4-percent
real growth rate and a $600 million current account deficit for
South Africa in 1985. Although we acknowledge that this perfor-
mance is possible, we believe that Pretoria will keep interest rates
near current record-high levels in order to avoid a too rapid
economic expansion that would generate this large current account
down gold and foreign currency reserves by $1.8
billion in 1981. In 1982, South Africa obtained a $1
billion loan from the IMF, although steady increases
in the price of gold during the latter half of the year
eased the foreign payments difficulties.
The Untimely Miniboom
A temporary rise in gold prices from less than $300
per ounce in June 1982 to more than $500 per ounce
in January 1983 triggered an economic upswing from
April 1983 to March 1984, despite a third consecu-
tive year of drought. Even after gold prices dropped
back by more than $100 per ounce in the second half
of February 1983, the boom continued; in our view,
consumers-in the expectation of a sustained recov-
ery and higher inflation rates-increased spending by
borrowing more and saving less. The ratio of savings
to aftertax income fell from over 11 percent in 1980
to only 3 percent in 1983. We believe that government
miscalculations about the weather and gold prices
also contributed to the false recovery because Pre-
toria did not clamp down on the economy by raising
interest rates or reducing government spending.
Strong consumer spending and drought-induced corn
purchases pushed imports up 21 percent in the fourth
quarter of 1983. This rise in imports-and afurther
drop in gold prices from $410 to $388 per ounce-
caused a current account deficit of $844 million in
that quarter. The current account surplus for all of
1983 was only $246 million far below predictions
by South African economists at the beginning of the
year that it would reach $2 billion.
Based on similiar assumptions, some private economic
forecasters in South Africa and the United States
expect a slight reduction in the rate of inflation to
about 10 to 11 percent in 1985-1 to 2 percentage
points lower than the rate we estimate for 1984.
25X1
25X1
Approved For Release 2009/02/04: CIA-RDP85SO0317R000300100004-3
 Approved For Release 2009/02/04: CIA-RDP85SO0317R000300100004-3
Confidential
Figure 2
South Africa: Selected Economic
Indicators, 1979-84
Growth of Real Domestic
Product
1979 80 81 82 83 84L,
a Projected.
h London average daily fixing price.
Sources: IMF, International Financial Statistics:
South African Reserve Bank, Quarterly Bulletin.
Economic growth greater than 3 percent would re-
quire a more rapid upswing than we expect in South
Africa's revenues from gold and other mineral sales
abroad. Most private economic forecasters project
that a high demand for dollars will keep gold prices in
the $300 to $400 per ounce range, with an average
gold price for 1985 of about $370.5 According to
public statements by representatives of the South
African mining industry, gold production probably
will increase only slightly in 1985. Likewise, although
the value of South Africa's nongold mineral exports
may continue to grow, we expect that a gradual
slowing of the world economic recovery will limit the
real growth of revenues from mineral sales to about
3 percent.
Most South African economists argue that avoiding
another economic downturn through 1985 and be-
yond-in the absence of higher gold prices-probably
will depend crucially upon keeping the economy from
expanding too rapidly, which would again lead to
untenable deficits. In particular, these economists
contend that excessive government spending could
trigger another increase in inflation and new foreign
payment problems that again would lead the govern-
ment to clamp down on economic growth. Otherwise,
Pretoria may be forced to increase foreign or domestic
borrowing in order to cover current account deficits.
Based on public statements and past "pay as you go"
practices, we believe that Pretoria will attach consid-
erable importance to avoiding sustained, heavy bor-
rowing. South African officials probably already are
concerned about the increase in the country's foreign
debt-which has risen from about $7 billion in 1980
to more than $15 billion at present, according to data
published by the Bank for International Settlements.
Moreover, increased government borrowing from
banks within South Africa would tend to raise already
high interest rates, and thus slow economic growth.
' Factors that might drive gold prices higher than expected would
include a major intensification of the Iran-Iraq war, default by one
or more of the major debtor nations, a significant reduction in
Soviet gold sales, major purchases of gold by governments or
international agencies, or a sharp economic downturn in the United
25X1
25X1
Approved For Release 2009/02/04: CIA-RDP85SO0317R000300100004-3
 Approved For Release 2009/02/04: CIA-RDP85SO0317R000300100004-3
Current account balance
3,422
3,622
-4,567
-2,962
246
-1,000
Merchandise trade balance
-1,100
-5,647
-9,804
-7,255
-5,067
-5,000
Merchandise exports, f.o.b.
10,469
12,553
11,006
9,359
9,290
9,600
Merchandise imports, f.o.b.
11,569
18,200
20,810
16,614
14,357
14,600
Net gold output
7,131
13,035
9,583
7,961
8,927
7,700
Net services
-2,803
-4,143
-4,771
-3,981
-3,940
-4,000
Net transfers
194
377
425
313
326
300
Total reserves, yearend b
5,176
7,695
4,380
3,970
4,084
Long-term capital movements
-1,216
-614
623
2,236
-394
Change in liabilities related to
reservesc
-476
1
2,103
305
997
Other short-term capital movements d
-1,709
-2,325
Gold valuation adjustments and SDR
allocations
2,419
1,258
Change in gross gold and other foreign
reserves
2,438
1,942
a Projected on the basis of an average gold price of $345 an ounce,
690-ton gold production, 3-percent growth in export demand, and
1.5-percent real domestic economic growth.
b Total reserves are not the sum of changes in reserves and the
previous year's total reserves because of year-to-year changes in
exchange rates.
c Liabilities related to reserves are short-term foreign liabilities of
the South African Reserve Bank and short-term foreign obligations
of the central government and commercial banks.
d Includes supplier credits and errors and omissions.
Longer Term Prospects
Based on our earlier analysis of South Africa's export
potential, we believe that the country's annual rate of
real economic growth in 1986-90 will average no more
than 3 percent. In our judgment, gold production will
probably continue to stagnate, with nongold exports
being insufficient to offset expected increases in im-
port costs and to allow for economic growth. Most of
South Africa's remaining gold ores are at extreme
depths and of low grade, according to South African
mining experts. These experts do not foresee major
new discoveries. Thus, although gold production may
rise in 1985, we believe that this is only a temporary
development, and Pretoria over the remainder of the
decade probably will continue periodically to con-
strain economic growth in order to cut imports and
reduce the need for foreign borrowing.
Against this backdrop of only modest economic per-
formance that we expect to prevail for at least the
next several years, President P. W. Botha is pursuing
a program of gradual racial reform. The most visible
element of this program is a new constitution that
provides for separate parliamentary chambers for
Coloreds and Indians, but that excludes the country's
black majority. We believe, however, that in order to
satisfy the demands of Colored and Indian representa-
tives, the government must also improve conditions
for the black majority.
Approved For Release 2009/02/04: CIA-RDP85SO0317R000300100004-3
 Approved For Release 2009/02/04: CIA-RDP85SO0317R000300100004-3
Confidential
The South African economy remains critically
dependent on its foreign gold sales, despite Pretoria's
efforts to diversify exports. Cyclical swings in South
Africa's economic performance mirror swings in the
world gold price. A $100 per ounce gold price change
equates to a $2.1 billion change in export receipts, or
12 percent of earnings we project for 1984. Moreover,
a $100 change in the gold price affects government
revenues by about $400 million.
Our projection of 2- to 3 -percent economic growth for
1985 is based on an assumed average gold price of
$370 per ounce, which many economists expect for
1985. Other assumptions about gold prices will affect
economic growth projections. For example, we believe
that an average gold price of $450 in 1985 would
enable Pretoria to boost economic growth to about 3
to 4 percent, and still maintain a current account
surplus. On the other hand, in our view, an average
gold price below $300 a would result in an economic
contraction and a substantial current account deficit.
a In our view, the gold price would be unlikely to fall below about
$270 per ounce because we believe that many gold mines would
become unprofitable at that price, thus reducing the supply of
newly mined gold.
Colored and Indian Demands
We believe that the government must sustain momen-
tum in its reform process if the new constitution is to
gain legitimacy among the Colored and Indian popu-
lations. Less than one-fifth of eligible Coloreds and
Indians voted in elections held last August for the
nonwhite chambers in Parliament.' Moreover, Col-
ored and Indian parliamentarians will be particularly
anxious to belie the charge of having "sold out" South
Africa's black majority, and will demand reforms that
would benefit South African blacks as well. For
example, Alan Hendrickse-leader of the Labor Par-
ty, which won 76 of the 80 seats in the Colored
6 In our view, the low turnout was the result of cynicism about
government intentions, as well as apathy, intimidation by opponents
to the constitution, and Pretoria's last-minute crackdown on those
elections-pushed for the government to lift the Col-
ored labor preference in the western Cape Province
that makes it difficult for blacks to compete for jobs
there; Botha recently announced that this change
would be implemented.
The government probably will continue to be sensitive
to Colored and Indian demands because its program
of gradual racial reform largely hinges on the viability
of the new constitution. Hendrickse already has
threatened that the Labor Party will pull out of the
new system unless substantial new reforms that bene-
fit all nonwhites are instituted in the next five years.
Reforms for Blacks
Although South Africa has taken no actions that have
weakened white control of either the government or
the economy, several recent reforms seem to signal an
important shift in Pretoria's policies toward improving
the condition of blacks residing in urban areas. Until
recently, Pretoria's apartheid policy has been built on
the premise that all blacks could express political
rights only in their assigned tribal homelands. The
government now has recognized, if only implicitly, 25X1
that a large and settled urban black population in
white areas is a permanent fixture on the South
African scene. This new realism is reflected in the
introduction in the late 1970s of a 99-year leasehold
system that allows urban blacks to lease land in white 25X1
areas. A recent regulation goes further and allows
blacks to renew these leases automatically on expira-
tion or at the time of sale; Pretoria, in effect, has
granted land title to blacks in areas of the country
previously reserved for whites
This acceptance of a permanent urban black popula-
tion in white areas has led the government to other
changes, including several intended to address the
need for additional black housing and improved facili-
ties in the affected urban areas. The government has:
? Initiated programs to provide electricity, street
lighting and paved sidewalks, sewerage, and shop-
ping centers to Soweto and some other major black
townships, according to press reports.
Approved For Release 2009/02/04: CIA-RDP85SO0317R000300100004-3
 Approved For Release 2009/02/04: CIA-RDP85SO0317R000300100004-3
The government's reform program in the near term
probably will improve only marginally the lives of
blacks living in white areas and will have even less
impact on those in impoverished tribal homelands.
Today, almost every aspect of daily life of blacks
living outside of the homelands is regulated by a
complex structure of discriminatory laws designed to
maintain white privilege and control.
Political Rights
Apartheid envisions that blacks will exercise political
rights only in the tribal homelands. When a home-
land becomes "independent, " South African blacks
belonging to that tribal group lose their South Afri-
can citizenship whether or not they were born in, or
reside in, the homeland. Outside of the homelands,
black political representation is limited to local
councils that most blacks resent for cooperating with
the white government.
Residence
Blacks living outside of the homelands are allowed to
live only in designated black townships, which have
poor or inadequate housing and services, and which
are located far from jobs in white cities.
Travel
Movement of blacks outside of the tribal homelands
is severely restricted, often entailing separation of
family members. Blacks must carry an identification
'pass book" and legally can only stay in white areas
for 72 hours unless they have a job or have gained
residing rights.
Education
Separate and unequal educational facilities are
maintained for the various racial groups, and black
teachers often lack a high school diploma themselves.
The government spends an average of seven times as
much to educate a white child as it does on schooling
for a black.
? Called upon the private sector to play a major role
in providing and financing black housing.
? Decided to sell-on generous terms-a large stock
of urban houses in black townships that had previ-
ously been available only as rentals.
? Lowered building regulation standards and promot-
ed self-housing programs.
Moreover, for blacks residing in urban areas, Pretoria
has opened new job opportunities, increased spending
on education, and legalized labor unions. Incentives
have been introduced for additional black training by
the private sector. According to press reports, Pretoria
even plans to impose school fees on the families of
white students to help fund increased educational
expenditures for the other racial groups. Despite these
reforms, however, the lives of blacks living in white
areas are unlikely to improve enough in the near term
to avoid periodic flareups of black unrest.
The Costs of Reform
Following through on these reforms would require
substantial government expenditures. For example,
according to data reported in the press, parity in
education for all ethnic groups in South Africa would
increase recurrent annual expenditures on education
by about $4 billion per year, about 16 percent of total
government expenditures. We estimate that even the
more modest goal of raising expenditures per black
student outside of the homelands to one-half the
average level enjoyed by white South African students
would increase recurrent annual expenditures by
nearly $500 million.
So far, Botha's reform program appears to have the
support of the majority of white South Africans,
based on results of the white referendum on the new
constitution. Slow economic growth during the re-
mainder of this decade, however, probably would
25X1
Approved For Release 2009/02/04: CIA-RDP85SO0317R000300100004-3
 Approved For Release 2009/02/04: CIA-RDP85SO0317R000300100004-3
Confidential
government social spending.
increase the political difficulty of further racial re-
forms that involved significant budgetary outlays.
Pretoria's efforts to reduce public-sector borrowing by
containing government spending implies that any
significant increase in expenditures on nonwhites
would come at the expense of whites. Moreover, many
farmers and middle-class consumers hit hard by high
interest rates and inflation probably already attribute
the recent tightening of credit restrictions to excessive
economic downturns.
Given South Africa's lukewarm economic prospects
and Pretoria's fiscal conservatism, we believe it un-
likely that the government will undertake new reforms
that involve significant additional government spend-
ing on nonwhites. Even a speculative surge in gold
prices would be unlikely, in our view, to induce South
Africa to enact massive new spending programs for
nonwhites, largely because Pretoria would not want to
be saddled with the added burden during subsequent
for Coloreds.
Pretoria no doubt recognizes that nonwhites are un-
likely to be satisfied with the limited economic re-
forms being considered. According to press reports,
the government, however, is considering several rela-
tively inexpensive measures:
? New incentives to encourage the promotion of
blacks into managerial positions in the private
sector.
? Admission of more blacks to white colleges, univer-
sities, and technical schools.
? Relaxation of regulations on business activities of
blacks in central city areas, as well as other restric-
tions on nonwhite businessmen.
? Elimination of bans on interracial marriages and
sex-a step of great symbolic importance, especially
reforms.
While we judge that there is little likelihood of new or
greatly expanded programs for nonwhites, we also
believe that Pretoria would avoid significant cuts in
existing programs unless the economy were severely
depressed. Even if, for example, gold prices failed to
rise above $340 per ounce, and Pretoria faced the
usual cycle of current account deficits and constraints
on growth, it has considerable financial resources to
cover short-term adjustments without risking either a
strong white reaction or backsliding on nonwhite
Under a worst case scenario-which we believe is
possible but not probable-South Africa would face
falling gold prices, perhaps combined with a fourth
year of drought in 1985, divestiture of foreign-owned
investments, and-as in 1976-an outflow of capital
as a result of continued black violence. According to
press reports, a private South African economic fore-
caster has projected that, if real interest rates in the
United States remain at their current high levels, by
1987 the price of gold would fall to less than $200 per
ounce. In this event, Pretoria would be forced to raise
the prime lending rate to over 35 percent in order to
prevent massive current account deficits, according to
this forecast. We believe that the economy would
enter a protracted depression, and that the living
conditions of both whites and nonwhites would deteri-
orate. We expect Pretoria-under this extreme
duress-would move to protect the interests of whites
by cutting spending on nonwhites.
The effect of South Africa's relatively poor economic
prospects on US interests in southern Africa probably
will be mixed. Slow economic growth in South Africa
will limit economic recovery among neighboring
states with which it has strong economic ties. For
example, some 18 to 20 percent of Zimbabwe's
exports go to South Africa, including 70 percent of its
manufactured exports. Likewise, Lesotho and other
black states that earn significant foreign exchange
from the remittances of "guest workers" they send to
South Africa will feel the pinch caused by a very
limited growth of mining employment and wage rates.
Such developments will compound the economic diffi-
culties that these countries are experiencing and may
lead them to look to the West-including the United
States-for additional economic aid.
On the other hand, budgetary constraints have made
Pretoria more sensitive to the economic drain caused
by financial and military support for Namibia. Al-
though we do not believe that financial considerations
25X1
25X1
25X1
25X1
- __r Approved For Release 2009/02/04: CIA-RDP85SO0317R000300100004-3
 Approved For Release 2009/02/04: CIA-RDP85SO0317R000300100004-3
alone would determine South Africa's desire for a
Namibian settlement, we expect that the increasing
financial drain of Namibia will reinforce US peace
initiatives in the region.'
We do not expect that South Africa's economic
troubles will give Washington much leverage over
Pretoria's domestic or foreign policies. South Africa
most likely will continue to plead for patience and
understanding of Pretoria's gradualist approach to
racial reform, citing among other factors the econom-
ic constraints on the reform process. However, as a
result of recent US legislation requiring that US
support for an IMF loan to South Africa be contin-
gent upon expected benefits for South Africa's blacks,
Washington may gain some new leverage should
South Africa approach the IMF for another standby
loan-which Pretoria almost certainly would do in the
event of serious economic decline.
25X1
25X1
Approved For Release 2009/02/04: CIA-RDP85SO0317R000300100004-3
 Approved For Release 2009/02/04: CIA-RDP85SO0317R000300100004-3
Confidential
Confidential
Approved For Release 2009/02/04: CIA-RDP85SO0317R000300100004-3