THE ECONOMIC SITUATION IN SOUTH VIETNAM

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP82S00205R000100130009-1
• Release Decision: RIFPUB
• Original Classification: S
• Document Page Count: 17
• Document Creation Date: November 9, 2016
• Document Release Date: January 6, 1999
• Sequence Number: 9
• Publication Date: October 1, 1970
• Content Type: REPORT

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Intelligence Report
DIRECTORATE OF
INTELLIGENCE
The Economic Situation in South Vietnam
6122/70
October 1970
Copy No.
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. ackgr?ound Use Only
WARNING
'['his document contains information affecting the national defense of the
CTnited States, within the meaning of Title 18, sections 793 and 794, of the
US Code, as amended. Its transmission or revelation of its contents to or
receipt by an unauthorized person is prohibited by law.
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No Foreign Dissem
CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
The Economic Situation In South Vietnam
Summary
On 3 October the Vietnamese government announced
an economic reform program designed to improve the
morale and effectiveness of government employees, to
contain inflation, and to curb profiteering by im-
porters. The measures enacted include a partial
devaluation of the piaster and a wage increase for
the civil service and the armed forces. Their impact
should be salutary, but basic forces causing infla-
tion and inequities in incomes will remain, and gains
will be short-lived unless the government takes
further action. Even so, US aid will remain the main
stabilizing influence on the economy.
Retail prices in Saigon increased very little
following the announcement of the reforms. On
12 October the USAID retail price index was no
higher than it was in early September. Following
the establishment of the new foreign exchange rate
of 275 piasters to the dollar, the black market
rate rose to 448 piasters per dollar on 12 October.
Charts on prices and money supply, import licens-
ing, currency and gold prices, the government budget,
and foreign exchange reserves follow the text.
Note: The Economic Situation In South Vietnam
will be published monthly. The next issue will
appear on 16 November 1970.
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Recent Economic Reforms
Background
1. During the past year the South Vietnamese
economy has suffered from a crisis of confidence.
Expectations of devaluation as a result of four
years during which the price level almost tripled
while the exchange rate was constant, rice market
difficulties, and uncertainties caused by US with-
drawal created a speculative climate that resulted
in rapid price increases and loss of confidence in
the piaster. Retail prices increased about 45%
during the past 12 months, and the black market price
of the piaster rose to a level three and one-half
times the official price. The government's inability
to deal strongly with these problems contributed to
the lack of confidence. Inept handling of a major
tax increase on imports last October led to further
speculation and resulted in the cost-of-living be-
coming an important source of dissatisfaction with
the Thieu government.
2. In addition to speculation, basic inflationary
pressures have been at work. The buildup of the
armed forces associated with the Vietnamization
program and the funding of programs such as vet-
erans' benefits are contributing to a growing budget
deficit. Revenues from imports began to fall off
in July as the government's cutback in import
licensing earlier in the year caused import arrivals
to decline. Collections of domestic revenues, such
as income and excise taxes, have increased con-
siderably this year, but the revenue base is small,
and collections are not expected to increase much
more than the rate of inflation. Above all, the
government realized some time ago that a wage in-
crease for the civil service and the armed forces
could not be delayed much longer. These groups,
whose support and effectiveness are vital to the
Thieu government and to the success of the Viet-
namization program, have suffered a 40% to 50%
decline in real income during the past five years,
most of it concentrated in the past year. A pay
increase for government employees, therefore, was
considered imperative, and means had to be found to
finance it.
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3. Last May, President Thieu asked the National
Assembly to give him decree powers over economic
matters for a period of five months so that he could
enact a major stabilization program. Not until
29 September, however, did the bill clear the
legislature and then only in greatly modified form.
The modified bill contained no provisions for in-
creasing taxes, but it did provide that Thieu
could establish a second, higher foreign exchange
rate for a wide range of transactions. With this
limited but politically crucial backing from the
National Assembly, Thieu announced, effective 5
October, a partial devaluation of the piaster as
well as other measures, for which he needed no
legislative approval. The latter included higher
duties on imports of luxury goods and agricultural
inputs, liberalization of import licensing, higher
official prices for imported rice in Military
Regions I and II, and a pay increase averaging
17% for government employees.
Reform Measures
4. The devaluation does not affect the exchange
rate for most imported goods or for US government
purchases of piasters for official use, which are
the most significant transactions. In 1969, for
example, imports of goods accounted for about 80%
of total foreign exchange expenditures on current
account, and US government purchases of piasters
for official use amounted to about 60% of total
exports of goods and services. For these two items
the exchange rate remains 118 piasters per dollar --
the official rate. A second exchange rate of 275
piasters per dollar, however, now has been
established to apply to purchases of piasters by US
personnel in Vietnam as well as to exports, imports
of luxury goods, and invisible transactions such
as profit remittances and foreign investment. The
new rate for US personnel should draw some dollars
away from the black market and into government
hands, but will be of little other benefit to the
Vietnamese. A higher exchange rate normally would
encourage exports and foreign investment, but South
Vietnam currently has little to export and holds
little attraction for investors. The higher exchange
rate for imports of luxury goods, such as Hondas and
refrigerators, should, however, tend to discourage
purchases of these goods and reduce importers' prof-
its. Luxury goods have accounted for 10% to 15%
of total imports during the past several years.
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5. Despite the National Assembly's refusal to
grant President Thieu power to change tax rates,
the government believes it has ample precedent for
levying or adjusting the perequation tax on im-
ports -- a form of customs duty collected by the
National Bank of Vietnam rather than by the customs
service -- without legislative approval. Thieu,
therefore, increased perequation taxes on many
imported luxury items and agricultural materials,
such as pesticides, tractors, and small engines.
The most important agricultural input -- fertil-
izer -- was exempted because there reportedly already
exist large amounts of unsold fertilizer, and
officials fear that higher fertilizer prices will
discourage its use, and consequently slow the in-
crease in rice output. As a result of the higher
tax rates, government revenues from perequation
taxes, which probably will total roughly 20 billion
piasters in 1970, are expected to increase by about
14 billion piasters in 1971.
6. In an attempt to increase competition among
importers and thereby eliminate excess profits, the
government announced plans to ease requirements for
the establishment of new import firms and eliminate
restrictions on the quantities and types of goods
that may be ordered. With a view to curbing specu-
lation, importers now are required to make large
advance deposits -- in some cases more than 100%
of the foreign exchange cost -- on orders for
some goods. This latter move ties in with the
higher interest rates announced last month by the
National Bank, which are designed to encourage
savings and make it more costly for importers and
others to engage in speculative activities. The
National Bank raised its rediscount rate for most
commercial paper from 7% to 18% and removed ceiling
rates on commercial bank loans and deposits. Com-
mercial banks then announced new interest rates
on loans ranging from 14% to 24% per year, compared
with former rates ranging from 8% to 14%. Rates
on 12-month time deposits were raised from 12% per
year to 20% per year.
7. To reduce inequities in the rice market,
the government raised the official price of
imported rice in Military Regions I and II to the
same'level that prevails in Saigon. The chief in-
tended consumers of imported rice in Military Regions
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I and II -- civil servants, soldiers, and their
dependents -- receive the same pay and allowances
as their counterparts in Saigon, and officials
apparently concluded that with improved security the
northern provinces no longer require special
treatment. In any case, the low prices frequently
were not passed on to consumers, because of corrupt
practices by the provincial and military officials
and the few favored merchants who handle distribution.
The government reportedly plans to open up the rice
trade to any licensed merchant who wishes to par-
ticipate, but it is not known when this reform is
to take effect.
8. The 17% wage increase for civil servants
and the military will cost about25 billion piasters
on an annual basis, or 13% of planned total ex-
penditures in 1970. The pay increase, however,
will by no means make up for the severe loss in real
income government employees have suffered during the
past five years, and especially last year. Prices
have risen about 55% just since the last government
pay increase in July 1969. Moreover, at least some
of the new wage increase will be offset by further
price increases. The wage increase itself, which,
including dependents, affects roughly one-third of
the population, probably will push up the general
price level somewhat. Prices doubtless will in-
crease for goods affected by the higher taxes and
exchange rate, and past experience suggests that
other prices also will rise. The government hopes
the impact will fall mainly on the urban rich and
to some extent on farmers, whose real incomes have
risen substantially during the past year or so.
9.. The program. enacted by the government is
designed to improve the morale and effectiveness
of government employees, to contain inflation, and
to curb some of the blatant profiteering by im-
porters. Its impact should be salutary but basic
forces causing inflation and inequities in incomes
will remain, and gains will be short-lived unless
the government takes further action. Because the
new, higher interest rates still are below the rate
of inflation, they probably are not high enough to
encourage savings and discourage speculation. The
effective exchange rate (the official rate plus
import taxes) for many imports remains too low
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compared with the domestic price level. It is esti-
mated that the combination of the new, higher ex-
change rate and higher taxes for some imports
amounts to an average effective devaluation of about
15% for all imports, excluding rice. This change,
in addition to the various increases in import taxes
in recent years, has doubled the effective exchange
rate since the 1966 devaluation, but the domestic
price level has tripled in the same period.
10. The creation of a dual exchange rate adds
to the government's administrative problems, which
already are considerable because of the complicated
structure of import taxes. Such a system lends it-
self to evasion. Smuggling of goods subject to the
higher exchange rate and taxes is likely to increase,
and demand for dollars on the black market to pay
for the smuggled goods also will increase -- a re-
peat of developments that followed the increase in
austerity taxes on imports in October 1969. More-
over, there might be some incentive to assemble or
produce luxury goods domestically from imported
materials and components not subject to the higher
rates. The government cannot simplify the import
tax structure, however, without authority from the
National Assembly.
11. Perhaps most crucial to the success of the
reform measures is the degree to which import
licensing is opened up. Restrictions on the quanti-
ties and types of goods that may be imported have
resulted in retail prices for many imports con-
siderably above importers' costs. Although these
costs now have been raised by the higher interest
and exchange rates and by higher taxes, the importers
simply will pass on the increase to consumers if
government restrictions on licensing are not eased.
Unfortunately, the government reportedly has delayed
opening up licensing because officials already are
having trouble coping with the dual exchange rate
and the new system of advance deposits. Moreover,
efforts to increase competition among importers may
not be successful. A relatively small number of
companies apparently account for a large proportion
of the import trade, and they probably will use their
considerable influence to maintain the status quo.
Finally, with most imports still at the low official
rate, the demand for imports still may considerably
exceed the supply of foreign exchange. If this is
so, open licensing, once introduced, could not be
sustained.
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12. The adoption of a uniform official price for
imported rice throughout the country is just the
first step in a rationalization of the rice market.
Eventually, all price controls on imported rice will
be abolished. If the country's output of rice con-
tinues to increase as rapidly as expected, the sale
of large amounts of imported rice to government
employees at prices below the free market level will
discourage marketing of domestic rice and thus
'perpetuate imports. Moreover, the present pricing
and distribution system for imported rice is ex-
tremely difficult to administer and is open to
corruption. The government has indicated that it
plans a series of price increases for imported rice
which eventually would bring the price of imports
in line with prices of domestic rice.
13. Increases in the official price of imported
rice probably will have to be accompanied by at
least offsetting increases in pay for government
workers if their real incomes are to be prevented
from deteriorating even further. Moreover, the
morale and performance of the civil service and the
armed forces depend not only on increasing their
real incomes but also on reforming the government
wage structure. Pay increases should be given as a
percentage increase of the employee's base pay
rather than being added on to family and cost-of-
living allowances as has often been done in the past.
The pay structure now is heavily weighted in favor
of employees with large families and does not
provide incentives for improved performance or
promotion. The increase granted this month re-
portedly was split between base pay and allowances.
14. As expenditures rise, revenues to cover them
will be difficult to find. Although the civil
service and the military forces experienced the
largest decline in real wages during the past year,
urban workers in general suffered. The dissatis-
faction of these two groups has become a major
political problem. Therefore, the government's
attempts to raise revenues will have to be aimed
increasingly at the urban rich who have benefited
from the war -- importers, merchants, and property
owners -- and at the farmers in secure areas who
have been getting high prices for their output and
no longer must pay rent. But the government is
not now administratively capable of systematically
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collecting taxes either from farmers or the urban
rich. Moreover, so long as the currency is over-
valued and restrictions on imports are maintained,
opportunities for making large windfall profits
will continue to exist.
15. To a great degree, the effect of the recent
reform measures depends on psychological factors that
are not predictable. It is impossible to say whether
expectations of further rapid inflation and/or de-
valuation, which tend to be self-fulfilling, will
be encouraged or discouraged by the government's
action. The new measures were widely publicized
before hand, however, and early reaction -- in terms
of price increase and public outcry -- has been
much milder than that which followed the austerity
tax increase a year ago. If the price increases --
and thus political repercussions -- that result are
not large, the government could take additional
stabilization measures during the next year which
would not require legislative action. More imports
could be shifted to the new exchange rate and further
adjustments could be made in interest rates, im-
port deposits, and perequation taxes. The Viet-
namese, however, have exhibited little flexibility
on these matters in the past, and with the presi-
dential election coming up in 1971 it seems un-
likely that President Thieu would be willing to
incur many additional political risks. Taking into
account Vietnamese political considerations and
the US government's desire to see Vietnamization
succeed, the major stabilizing influence on the
economy will have to continue to be US aid, which
will increase by about $100 million to a total of
about $750 million in 1971.
Prices
16. Retail prices in Saigon increased very little
immediately following the announcement of the re-
form measures on 3 October. The USAID weekly index
rose 2% during the week ending 5 October and another
2% the following week. The overall price level on
12 October, however, was no higher than it was in
early September, or 30% above the average price
level for December 1969. The retail price index
includes mainly domestically produced goods, which
were not directly affected by the reform measures.
Data on changes in the prices of imported goods
since 3 October are not available.
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Currency and Gold
17. Saigon black market prices of dollars and
gold increased following the establishment of the
new parallel exchange rate of 275 piasters per
dollar. The price of dollars rose from 426 piasters
per dollar on 29 September to 448 piasters per
dollar on 12 October. The price of a dollar?s worth
of gold leaf increased from 505 to 545 piasters
during the same period.
18. As a result of the recent devaluation,
American and other foreign military and civilian
personnel working for US agencies and their con-
tractors, who are paid in Military Payment Certifi-
cates (MPCs), may now legally exchange their MPCs
for piasters at the rate of 275 to 1. (MPCs are
officially on a par with the dollar and are legal
exchange only in US installations for authorized
personnel.) Following the change in the exchange
rate, a new series of MPC currency was issued
on 7 October. On 12 October the black market rate
for the new MPCs was 310 piasters per dollar, or
13% above the new official rate.
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SOUTH VIETNAM
Indexes of Money Supply and Saigon Consumer Prices
1965 1966 1967
* USAID monthly average retail price index for Saigon
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IMPORT LICENSING
(Millions of Dollars)
1965 1966 1967
Total Total Total
407 660 531
1968
Total
624
1969
Total
740
1970
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Saigon Free Market Gold and Currency Prices
GOLD Basis: gold leaf worth $35 per troy ounce
US $10 GREEN
1970 1970
US $10 MPG Military Payment Certificates (scrip)
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GOVERNMENT BUDGET *
(Billions of Piasters)
Foreign Aid
Domestic Taxes
Import Taxes
1971
Plan
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South Vietnam: Foreign Exchange Reserves*
o
*Excluding holdings of commercial banks
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Secret
Secret
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