INTERNATIONAL ECONOMIC & ENERGY WEEKLY 6 MAY 1983

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP84-00898R000200050005-5
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 39
• Document Creation Date: December 22, 2016
• Document Release Date: January 12, 2011
• Sequence Number: 5
• Publication Date: May 6, 1983
• Content Type: REPORT

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Directorate of 3',
Intelligence
International
Economic & Energy
Weekly
DI IEEW 83-018
6 May 1983
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Weekly
International
Economic & Energy
6 May 1983
1 Perspective-Soviet Cost of Client States
3 Briefs Energy
International Trade, Technology, and Finance
National Developments
13 The Polish Economy: Performance and Prospects
19 Sub-Saharan Africa: Long-Term Food Outlook
27 Oman: Adjusting to Declining Oil Revenues
Morocco: Mounting Financial Problems
directed Directorate of Intelligenc
Comments and queries regarding this publication are welcome. They may be
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International
Economic & Energy
Weekly
Synopsis
year.
Perspective-Soviet Cost of Client States 25X1
Despite slow growth and foreign exchange shortages at home, the Kremlin is
shouldering a growing burden of support for its client states. Measured in
current dollars, Soviet economic and military assistance to four showcase
countries-Angola, Cuba, Ethiopia, and Vietnam-has mushroomed since the
mid-1970s, rising from about $1.4 billion in 1975 to a record $7 billion last
to remain below the 1978 level for several years.
The Polish Economy: Performance and Prospects 25X1
The military regime succeeded in 1982 in slowing the decline in industrial
production, increasing the trade surplus with the West, and imposing some
austerity on the economy. After a year of martial law, however, Poland's major
problems-huge debt obligations, shortages of consumer goods; and worker
distrust of the regime-remain, and overall economic performance is expected
these expenses, Oman is likely to seek additional economic assistance,
Sub-Saharan Africa: Long-Term Food Outlook 25X1
We believe that few African countries will escape food shortages in the 1980s. I
Food supply problems are likely to serve as flashpoints for urban unrest.) 25X1
Oman: Adjusting to Declining Oil Revenues) 25X1
Oman-dependent on oil for the bulk of government revenues-is likely to run
budget and current account deficits in 1983. To shoulder some of the burden of
especially from its richer Gulf neighbors and the United States.
Morocco: Mounting Financial ProblemsF___1 25X1
Hit in recent years by the depressed phosphate market and a severe drought,
Morocco resorted to foreign borrowing to cover growing current account
deficits. Dealing with the country's serious financial situation may preclude
significant economic growth or improvement in the standard of living, and
Hassan may have to rely more heavily on his security forces to maintain order.
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International
Economic & Energy
Weekly
6 May 1983
Perspective Soviet Cost of Client States
Despite slow growth and foreign exchange shortages at home, the Kremlin is
shouldering a growing burden of support for its client states. Measured in
current dollars, Soviet economic and military assistance to four showcase
countries-Angola, Cuba, Ethiopia, and Vietnam-has mushroomed since the
mid-1970s, rising from about $1.4 billion in 1975 to a record $7 billion last
year. In all, an estimated $35 billion in grants, subsidies, and soft loans were
funneled to this group over the past eight years.
The dramatic increase in Soviet assistance reflects the clients' growing
economic problems and perceived military needs. Cuba has become the largest
burden; nearly one-third of Soviet aid supplied to all LDCs since 1975 has
gone to Havana. Except for a lessening of Soviet oil subsidies stemming from
lower world oil prices, there is little to indicate Soviet aid to these states will be
cut back, at least through this year. In addition, aid to other clients such as Af-
ghanistan and Syria promises to push the burden even higher.
The Cuban economy, in our judgment, is facing its most difficult period since
Fidel Castro took power in 1959. Plunging hard currency exports and
continued lender wariness point to declining output in 1983, and a greater
demand on the Soviet Union for economic assistance.
In 1982 the Soviet Union provided an estimated $4.7 billion of economic
assistance and $590 million of military assistance to Havana. With these
deliveries, total estimated Soviet aid to Cuba rose to nearly $25 billion since
1975. This aid consists primarily of trade subsidies; last year, for example,
Moscow charged Havana as little as $16 per barrel for oil, or half the OPEC
benchmark price. In addition, Moscow paid the equivalent of 42 cents per
pound for Cuban sugar, five times the 1982 world market price. Moscow also
permitted the Castro government to run large soft currency trade deficits with
the USSR and funded a number of development projects.
Soviet assistance to Vietnam has more than doubled since the mid-1970s,
raising the yearly cost to Moscow to well over $1 billion. Most Soviet economic
aid is food, petroleum products, and capital projects. The upgrading of the
Vietnamese armed forces following the 1979 border war with China largely
accounts for the sharp rise in Soviet arms assistance in recent years. Even
though deliveries of Soviet arms dropped back to under $300 million in 1982,
they remain well above the pre-1979 average of about $50 million.
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Moscow's economic stake in black Africa is minor; less than 10 percent of So-
viet assistance has gone to this region. Unlike in Cuba and Vietnam, the
Soviets have emphasized military support in Africa while downplaying
concessionary economic assistance and handouts. This situation, however,
could be changing for Moscow's favored black African clients. The serious
economic declines in Angola and Ethiopia may have forced a reassessment last
year in Soviet planning. In 1982, both of these countries received relatively
large new aid commitments.
Angola has been unable to reverse the steady erosion of its economy. Once an
agricultural exporter, the country now imports 90 percent of its urban food
needs; the insurgency has brought its rail system to a near halt; and
manufacturing has dropped sharply. The plunge in oil prices-petroleum
contributes 80 percent of Angola's export earnings-has placed Angola in an
almost impossible situation. The government is virtually bankrupt and heavily
mortgaged to Moscow and Havana
The USSR has supplied Angola with over $800 million in assistance since
1975, all but $32 million going to the military. Soviet reluctance to pledge any-
thing more than token amounts of economic assistance has strained relations.
Moscow last year signed an economic agreement that could ultimately provide
$2 billion in credits; however, relatively stringent terms and Angolan wariness
about proposed projects could lead to further problems.
Ethiopia's strategic location on the Red Sea has helped make it the largest re-
cipient of Soviet aid in Sub-Saharan Africa. More than $2 billion in Soviet
arms have been received since the Mengistu takeover, and another $1.7 billion
in military agreements have yet to be implemented. Soviet economic aid to
Ethiopia-about $400 million since 1975-lags far behind the nearly $1.2
billion disbursed by Western donors during the same period. Soviet economic
aid has been primarily petroleum subsidies-Moscow has supplied all of
Ethiopia's oil since 1980.
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Energy
Algerian-Italian Gas The signing last week by Algiers and Rome of the final agreement for the pur-
Accord Signed chase of Algerian natural gas will allow gas to begin flowing through the
trans-Mediterranean pipeline soon, possibly as early as June. The last obstacle
was cleared when the Italian Senate approved a subsidy of $0.53 per million
Btu-the difference between the sale price and the market price-to be paid to
the state-controlled Italian gas company. Although the agreement calls for
sales of up to 20 billion cubic meters over the next three years, Italy reportedly
expects to purchase about 2 bcm in 1983, 6 bcm in 1984, 8 bcm in 1985, and
12 bcm annually thereafter. Gas prices will be indexed quarterly to crude oil
prices. Production problems in Algeria's major gasfields, however, are likely to
prevent it from meeting all of its gas commitments to other countries. Sales of
gas through the pipeline offer the greatest profit for Algeria, and Algiers
probably will cut deliveries of liquefied natural gas to the United States and
other customers in order to meet its commitments to Italy
Further Canadian Gas Ottawa is considering additional price cuts of $1.10 per thousand cubic feet
Price Cuts Expected (tcf) on Canadian gas exports. The reduction would apply only to purchases
above 50 percent of volumes authorized in current contracts. While the recent
reduction in Canada's base export price to $4.40 per tcf was primarily
intended to prevent further declines in Canadian gas sales, officials hope that
an incentive price of $3.30 on incremental volumes will help recover lost US
market share. Most industry sources agree that Canadian gas exports would be
more competitive under such a two-tier pricing system. We believe the
incremental pricing plan, which has the support of Alberta, the major gas-
producing province, will be announced within the next several weeks.
Sharp Cuts in Japanese The Japan Electric Power Survey Committee has cut back its official forecast
Electricity Demand for electricity generation in the early 1990s by 17 percent to 743 terawatt
hours. Reduced projections of economic growth-now expected to average 4
percent annually throughout the decade-and greater weight given to struc-
tural changes in the Japanese economy are primarily responsible for the sharp
cutbacks in the forecast. Industrial electricity demand, for example, is
expected to grow by less than 2.5 percent per year as a result of shifts away
from heavy industry to light industrial fabrication and high technology. The
forecast, which provides the basis for revising construction plans for the
electric power industry, will probably cause a delay of several years in new
plant construction programs. Japan's nuclear power program, which was slated
for rapid growth, will also be adversely affected.
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International Trade, Technology, and Finance
Recovery in Non-Communist steel production recovered partially in the first quarter from
Steel Production the depressed levels of late 1982. Based on data for the 29 countries reporting
to the International Iron and Steel Institute-representing about 98 percent of
non-Communist output-we estimate that crude steel production in the first
quarter rose to an annual rate of 380 million tons, up nearly 8 percent from the
fourth quarter 1982 level. The increase was accounted for equally by the EC
and the United States. While the improving trend is likely to continue, most
steel analysts still expect that output for the full year will do little more than
recover to the 395 million tons produced in 1982.
The market, nevertheless, remains weak and the EC Commission is maintain-
ing a tight rein on production in order to sustain the modest price increases it
has been able to enforce since the first of the year. Although new orders in the
United States and Western Europe are exceeding current production levels,
the surge in new orders that occurred early in the year appears to have leveled
off and the outlook remains uncertain. In Japan and in most other non-
Communist steel-producing countries, no clear recovery is in sight.
Tentative Agreement on The EC Council agreed in principle last week to extend the Community's
EC Steel Quotas internal system of steel production quotas past the 30 June expiration date. Al-
though West Germany opposes the use of quotas, it acquiesced because it
believes quotas are necessary as long as other EC countries continue to
subsidize their steel industries. A number of details must be worked out,
however, before a final agreement can be reached. The United Kingdom and
France argue that they have already taken specific steps to reduce overman-
ning and excess capacity and hence want preferential treatment when the
Commission establishes the quotas. Moreover, the Commission would like to
get the program extended until 31 December 1985, when state assistance to
the industry is due to be phased out. Questions about extending coverage to ad-
ditional products, such as heavy plates and beams, and complaints about
inadequate price discipline among producers also are yet to be addressed.
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The quota system is an important element of the Commission's strategy for re-
vitalizing the EC steel industry. Without this mechanism the Commission
would have an even more difficult time trying to restore the financial health of
the industry because supply probably would soon outstrip demands, sending
prices spiraling downward. The Commission also wants to keep a tight rein on
sales to the United States. If the quota system is eliminated, the resultant
overproduction might lead EC steelmakers to try to increase their US sales in
violation of the October 1982 US-EC steel accord. EC Commission officials
hope to reach final agreement on the extention of the quota system at the next
Council meeting scheduled for 25 May in Brussels.
OECD Consensus Rates The EC, constrained by an inflexible mandate, prevented agreement on new
Extended Through consensus interest rates at the OECD meeting last week on export credits. The
June OECD agreed to extend the present arrangement-scheduled to expire on
30 April-until 30 June to give the Community time to develop more
accommodating proposals. Although other countries were willing to accept a
reduction in interest rates on government-backed export credits, the EC's call
for a 2-percentage-point drop was unacceptably large. The EC, however, was
able to support in principle a new interest rate system-backed by the United
States-in which consensus rates would be adjusted automatically to changes
in market interest rates once the base consensus rates have been agreed upon.
The EC's mandate largely reflected French demands for a marked reduction
in consensus interest rates. France, along with Italy, remains the only
Community country having commercial interest rates substantially above the
current OECD consensus rates-12.4 percent for countries with per capita
incomes in excess of $4,000. While a reduction in the consensus rates increases
the French subsidy on officially backed export credits, it also increases the
competitiveness of French export financing. With market rates generally
falling elsewhere in the OECD, French competitiveness will be further
enhanced by the OECD adoption of adjustable rates. Since extending the
current fixed consensus rates hurts France's competitive position, we believe
France probably will modify its position to allow the EC negotiator more
flexibility at the next OECD arrangement meeting to be held 27-28 June.l 25X1
Western Europe's Space The European Space Agency (ESA) needs a successful launch to restore
Program on the Line customer confidence in the Ariane commercial space program. Ariane has a
success rate of only 60 percent, and the first commercial launch in September
1982 was a failure. Although ESA is under pressure to meet its next scheduled
launch on 3 June, we do not believe it can do so without risking another
failure.
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ESA, through the Ariane program, hopes to capture a major share of the
market for space launch services estimated by Western experts to be approxi-
mately $20-30 billion in the next decade. Questions about launch vehicle
reliability, however, have weakened the competitive position of Ariane, and
ESA needs a success if it is to remain competitive in the bidding for the launch
contract for five of the Intelsat communication satellites. Intelsat probably is
waiting for the June Ariane and August shuttle launch by the United States
before awarding the contract. ESA has already lost one customer to the United
States when the Dutch, a member of ESA, recently decided to cancel their
launch contract with Ariane in favor of a launch in May by a US Delta
booster. Another Ariane failure probably would result in more customer
defections and could place the entire Ariane program in jeopardy.
EC and Spain Reach The EC and Spain have negotiated an agreement that allows Madrid to
Trade Agreement maintain quotas on imports of selected sensitive items from the EC for up to
four years after Spain joins the Community. The EC insisted, however, that
Spain's quantitative restrictions on imports of autos from the Ten be removed
after accession. Both sides agreed to raise the limits on their textile imports
gradually during the first four years of Spanish membership as a means of eas-
ing the shock to an industry that is in trouble throughout Western Europe. The
agreement may reflect the Commission's desire to mollify the Spanish, who
have threatened to withdraw their application for membership because of the
lack of progress in the negotiations. Madrid probably will continue to use this
ploy in the hope of pressuring the Ten to conclude discussions by next year,
opening the way for accession by 1986
India Adopts a More Indian officials last month announced measures to protect domestic industry
Protectionist Stance and spur exports. Curbs on trading intermediaries and lower purchases of
components and spare parts are expected to help cut foreign purchases by $500
million. At the same time, manufacturers who export a large share of
production will be rewarded with additional import licenses and easier access
to capital goods that are not produced in India. In addition, private traders
may now export a wider range of agricultural items. In our judgment, the new
regulations are an attempt to appease domestic producers, deal with last year's
$6 billion trade deficit, and cope with expected financial strains over the next
several years when IMF support, which now provides about $2 billion a year,
will be reduced. A tighter import policy will, however, reduce pressure on
domestic manufacturers to become more efficient and will curtail flexibility in
using imports to spur industrial growth.
Spanish Financial Aid Spain agreed on 25 April to extend $45 million in credits to Nicaragua over
For Nicaragua the next three years for the purchase of Spanish goods. Madrid gave Managua
$25 million in credits last year, and the total of $70 million makes Spain one of
Nicaragua's largest European lenders. A Spanish diplomat in Managua told
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US officials that he believes Madrid does not expect repayment. The new
credits underscore the Gonzalez government's willingness to use public funds
to increase Spain's share of international trade with Latin America. Because
they are earmarked for the purchase of Spanish goods, the credits will help
stimulate Spain's lagging export industries. Prime Minister Gonzalez probably
hopes the credits will have a moderating effect on the Sandinistas as well as
loosen Nicaragua's economic ties to Eastern Europe. The Sandinistas, mean-
while, will portray the credits as a sign of international acceptance.
Comoros Expanding As part of his search for development assistance, Comoran President Abdallah
Relations With is expanding economic ties with the South African Government. According to
South Africa the US Embassy, Pretoria has agreed to provide $30 million for the construc-
tion of four hotels on the islands. In addition, South African Airlines will start
weekly service to the Comoros beginning in July. The Comoros are geographi-
cally isolated with a low revenue base, and Comoran officials have told the
Embassy that South Africa is the only hope for desperately needed funds.
Pretoria, for its part, probably will try at some point to use its assistance as le-
verage on the Comoran Government to establish diplomatic relations. So far,
Malawi, is the only black African government to recognize the South African
regime.
National Developments
Developed Countries
Japanese Wage Round Workers in Japan's major industrial sectors this year accepted record-low
Unusually Quiet wage increases averaging 4.4 percent. The compromise was well below the
already modest 7 percent unions had demanded and reflected the poor state of
the labor market, where only six openings exist for every 10 applicants. The
nominal wage settlements suggest a 1-percent increase in real wages. We do
not believe this will be enough to spur the lackluster Japanese economy unless
consumers trim their saving rate. Without some pickup in consumption, Tokyo
will have to give serious consideration to more stimulative monetary and fiscal
policies, perhaps this summer when debate on a tax cut is scheduled.
Spain's 1983 Budget The Gonzalez government has presented to Parliament a generally conserva-
tive budget designed to halt the rapid growth of the public-sector deficit and
reduce inflationary pressures. The projected deficit of $8.2 billion for this year
represents a $600 million decrease compared with the budgeted deficit for
1982. While the actual deficit may rise to $10 billion because of commitments
made by the previous government, the Socialists should still attain their
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objective of holding the deficit at 6 percent of GDP. Borrowing from the
central bank is unlikely to exceed 7 percent of the total financing requirement,
compared with about 75 percent in 1981 and 1982. This will curtail the growth
of the money supply and should help bring inflation down from its current
14-percent rate to a level closer to the 12-percent target.
Less Developed Countries
Mexico Holding the President de la Madrid this week refused to grant an early increase in the
Line on Wages minimum wage despite intensive lobbying by key labor leaders. Even in the
face of widespread distress among the rank and file over falling real wages, 1.5
million workers demonstrated support for the government during the tradition-
al May Day parade. The workers' show of support represents a small but
important victory for de la Madrid, who thus far has displayed considerable
political skill in managing the crucial labor sector. He will face another
difficult test when he decides on the wage increase scheduled for July.
First-Quarter Improve- Although Buenos Aires has not resolved its difficulties, economic performance
ment for Argentina through March offers a glimmer of hope:
? Inflation, running at 44 percent during the first quarter, is far above IMF
guidelines but has decreased steadily since January.
? A trade surplus of $610 million was recorded for January and February, and
press reports have touted a $1.25 billion surplus for the quarter.
? Tighter fiscal management has held the public-sector deficit below
expectations.
? Despite some slippage on Fund targets, we expect that the IMF team
returning to Buenos Aires next week will recommend the disbursement of
$330 million later this month.
The first-quarter performance should facilitate completion of the five-year,
$1.5 billion commercial bank loan now under discussion. The flow of funds
from the banks and the IMF are essential to support the current military
regime's efforts to maintain its stabilization program. We expect, however,
that pressures for investment projects and spending faciliated by the budget
approval in late March could lead to a breakdown of fiscal discipline over the
next few months and a subsequent increase in Central Bank credit to the
government far in excess of Fund targets. Should the IMF program collapse
and cause bank lending to evaporate, a sharply deteriorating financial picture
requiring a more austere stabilization plan would await the new civilian
government in January.
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Philippine Balance of Lower international interest rates helped Manila trim the first-quarter current
Payments Still Weak account deficit by $135 million, but the merchandise trade deficit-at $653
million-showed almost no improvement. Despite a near record 8-percent rate
of depreciation of the peso and a new import surcharge, imports grew by 3 per-
cent. Manila received the first installment of the recently negotiated $347
million IMF standby loan, but Central Bank reserves still fell by almost $300
million to $1.4 billion, equal to barely two month's imports. At the same time,
Manila began experiencing some difficulty rolling over short-term credits
extended by foreign commercial banks.
Manila's debt management policies, meanwhile, are stirring domestic criti-
cism. Budget austerity and Central Bank exchange rate policy-both pledged
to the IMF to obtain the standby credit-are provoking strong protests from
domestic business interests. Late last month Prime Minister Ceasar Virata
also drew unusual fire from a ruling party caucus-led by Imelda Marcos-
which expressed a lack of confidence in his conduct of economic policy.F_~ 25X1
Guyana Spurns Latest Guyana has rejected the IMF's latest terms for a reported $187 million loan,
IMF Offer marking the latest development in an 18-month campaign to regain IMF help
for the rapidly crumbling economy. Last year real output plunged an
estimated 10 percent, consumption 20 percent, and investment 33 percent from
already depressed 1981 levels. Mismanagement, corruption, and import
constraints will continue to depress production this year in the key rice,
bauxite, and sugar sectors, and slack world demand will compound chronic
marketing difficulties. The Burnham regime has steadily enlarged state
control to over 80 percent of the economy-nearly ruining the private sector-
to provide jobs for its followers. IMF and World Bank pressure to revive the
business community threatens this arrangement, making it unlikely that an
IMF agreement will be reached any time soon.
Aid for Bangladesh The World Bank-sponsored Aid Club in mid-April committed $1.8 billion-
including $500 million in food assistance-to Bangladesh for the fiscal year
that begins on 1 July. The new aid commitments represent a 12.5-percent
increase over FY 1983 levels. Most members were reluctant to increase their
commitments substantially, in part because they felt Bangladesh is unable to
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absorb large increases in aid quickly and efficiently. Nonetheless, aid commit-
ments at current levels probably will enable Bangladesh to maintain satisfac-
tory economic growth over the next two years.
Ecuadorean Trade Despite a $197 million trade surplus in the first quarter as compared with a
Constraints $25 million surplus in the same period last year, businessmen are complaining
increasingly about import controls, rising domestic prices, and a scarcity of
foreign exchange. According to Finance Minister Pinto, the devaluation in
March of the sucre will boost the overall competitiveness of Ecuadorean
exports, which in turn will help ease the government's financing problems
through increased revenues. We believe, however, that the economy will
continue to falter until Quito obtains IMF and new commercial bank credits,
clears up arrearages, or obtains new import financing.
Afghan Development Kabul has shelved its multiyear development plan in favor of an annual
Planning Difficulties approach
Although the Afghan
Government has signed agreements-mostly with the Soviet Union and Bloc
countries-that would have provided sufficient capital for the multiyear plan,
inept handling of foreign funds and lower-than-expected revenues appear to
have hampered project implementation. Even in the power sector-one of the
few segments of the economy with concrete development plans-the comple-
tion of projects is threatened by increasing insurgent attacks on power facilities
and lines, which are already resulting in blackouts in Kabul.
Long-Term Soviet A Soviet economist recently told the US Embassy in Moscow that the USSR
Energy Program will soon announce a 20-year energy program calling for some changes in
energy policy involving goals beyond the current five-year plan, which expires
in 1985. Some investment is to shift from current oil production to exploration
for new deposits, and investment in coal production is to rise. Future hard
currency revenues will be obtained by raising gas exports and sustaining oil ex-
ports. To do this, the economist said gas would increasingly be substituted for
oil in domestic use and domestic allocations of oil might be cut before oil
exports, even though this would slow economic growth.
The energy program is one of several new long-term efforts the Soviets are
making to focus resources on major problem areas. It appears to be more
practical than previous ones. The program will be difficult to carry out,
however, because of growing competition for investment resources. In addition,
planners are unlikely to make large cuts in domestic oil allocations without a
reduction in exports.
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Fast Start for Soviet The spring grain sowing campaign in the USSR is well ahead of the normal
Spring Grains schedule. The Central Statistical Administration reports that as of 25 April,
26.1 million hectares had been sown, double that of a year ago and second only
to the record sown in 1975. Additional grainland is still to be planted in the
European USSR and east of the Urals. If farmers maintain this pace and
complete planting ahead of schedule, chances are good that the spring crop-
which usually accounts for two-thirds of total grain production-will reach the
crucial flowering stage before the summer's hottest weather. Weather condi-
tions, however, will still play the key role in determining final grain output.
Even with a bumper spring grain harvest, damage already sustained by the
winter grains will prevent the USSR from reaching its goal of 238 million tons
this year.
Beijing Struggling To Beijing's inability to slow the growth of investment and heavy industrial
Regain Control Over production is straining scarce energy supplies and disrupting the production of
Investment consumer goods. For first-quarter 1983, heavy industrial output was up
11.7 percent-against a 3-percent plan-while light industry was well below
its 5- percent target, registering only 2.5-percent growth. Economic reforms
that reduced central control over investment have undermined efforts to
impose austere investment plans. Investment last year-40 percent over plan-
boosted demand for producer goods, stimulating a much sharper increase in
heavy industry than planned, which in turn put greater pressure on scarce
energy supplies
The government late last year took steps to recentralize control over invest-
ment spending and legislated heavy financial penalties for above-quota local
investment. We do not believe, however, that Beijing can attain the 7-percent
reduction in investment planned for 1983 unless the government takes more
drastic measures. If first-quarter trends continue, we expect the current
squeeze on energy and consumer goods to worsen. More important, we believe
Beijing will have difficulty focusing investment funds in critical sectors such as
energy and transport, possibly upsetting the country's long-range development
program.
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The Polish Economy:
Performance and Prospects
The military regime succeeded in 1982 in slowing
the decline in industrial production, increasing the
trade surplus with the West, and imposing some
austerity on the economy. After a year of martial
law, however, Poland's major problems-huge debt
obligations, shortages of consumer goods, and
worker distrust of the regime-remain, and overall
economic performance is expected to stay below the
1978 level for several years.
Martial Law Policy
A major goal of the martial law regime was to
stabilize the economy-industrial output had
dropped 15 percent in 1981. The regime appointed
military commissars to run more than 200 large
factories, reinstituted the traditional longer work-
week, established harsh penalties for absenteeism
and strikes, and strengthened central controls over
industrial inputs and outputs. The Planning Com-
mission continued to set most factory production
goals on a quarterly or even monthly basis.
The regime tried to balance supply and demand,
largely by implementing long overdue retail price
increases. The government also attempted to in-
crease the supply of goods in state markets by
boosting agricultural procurement prices, threaten-
ing private farmers with compulsory deliveries, and
cracking down on black market sales. Furthermore,
the regime sought to cut back investment-which
had already fallen by about 40 percent during
1979-81.To cover repayments required by bank
rescheduling agreements, Warsaw planned to cut
imports from the West drastically and to increase
exports.
Poland: Monthly Industrial Production'
The regime had mixed success in attaining its
goals. Overall economic activity declined by about
4 percent in 1982, an improvement compared with
the 5.4-percent decline in 1981:
? Industrial production was only 2 percent below
1981.
? The extractive industries boosted output by 11
percent largely because coal production rose 16
percent.
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Gross national product a (index: 1977 =100)
103.6
101.8
98.5
93.2
89.5
Industrial production b (index: 1977 = 100)
101.6
100.7
99.4
84.7
83.0
Coal (million tons)
192.6
201.1
193.1
163.0
189.3
Copper (thousand tons)
332
336
357
327
348
Raw steel (million tons)
19.25
19.22
19.49
15.72
14.47
Rolled steel products (million tons)
13.57
13.57
13.55
11.06
10.48
Agricultural Production b
Grain (million tons)
21.5
17.3
18.3
19.7
21.2
Potatoes (million tons)
46.6
49.6
26.4
42.6
32.0
Sugar beets (million tons)
15.7
14.2
10.1
15.9
15.1
Cattle (million head)
13.1
13.0
12.6
11.8
11.9
Hogs (million head)
21.7
21.2
21.3
18.5
19.5
Investment b (index: 1977 =100)
102.1
94.0
82.4
62.8
51.2
Real wages b (index: 1977 =100)
97.3
99.2
103.2
104.2
80.6
Consumer prices b (index: 1977 = 100)
108.7
116.0
126.6
157.5
315.0
Trade with the West c
Exports (million US $)
5,481
6,350
7,506
5,448
5,639
Imports (million US $)
7,368
8,038
8,488
5,422
4,174
Financing requirements a (billion US $)
5.8
6.7
7.8
10.0
11.2
Gross debt a (million US $)
17,844
22,669
24,840
25,500
24,300
a Western estimate.
b Polish Statistical Office, Polish Statistical Yearbook, 1982.
Customs data.
? Manufacturing output dropped 3 percent because
of the lack of Western inputs and shortages of
skilled labor as the government implemented new
liberal early retirement policies.
? Investment fell 18 percent from the previous year.
? Agricultural output dropped 4.5 percent, with
crop production down 3.3 percent and the output
of livestock products down 5.8 percent.
Despite an above-average grain harvest, the gov-
ernment failed to buy enough grain from private
farmers to meet state retail needs because many
farmers used the grain to feed their livestock. The
output of potatoes, meat, eggs, and milk declined,
adding to food shortages in state markets.
Warsaw ran a trade surplus of nearly $1.5 billion
with the West in 1982.2 According to Polish cus-
toms data, imports from the West declined 23
percent while exports to the West increased 4
percent. Although imports of capital investment
goods fell 48 percent, imports of raw materials and
Payments data show a surplus of $350 million. On a customs
basis, the surplus was nearly $1.5 billion. We have not been able to
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spare parts for industry declined only 11 percent,
an indication that the regime seems to have concen-
trated on purchases of goods needed to help sustain
industrial production. Exports of fuel and energy
products increased 35 percent, while exports of
machinery and spare parts dropped 29 percent,
chemicals 13 percent, and consumer goods 25
percent.
The doubling of prices in February 1982 helped for
a short time to better balance overall consumer
supply and demand. Demand pressures grew later
in the year, however, because of increases in wages
and social benefits, including wage hikes granted
late in the year by some enterprises exercising their
powers under the economic reform. As a result,
purchasing power at the end of 1982, according to
Polish economists, exceeded the supply of goods
and services by 15 percent-the same as before the
price increases. Moreover, the impact of the auster-
ity measures was uneven. The average Polish work-
er, whose real wages declined 23 percent, experi-
enced acute economic hardship and, because of
high prices, could not even buy all the goods
available to him on his ration cards. On the other
hand, some high income groups, especially profes-
sionals, private businessmen, and coal miners, con-
tinued to wield considerable purchasing power
The government failed to implement some planned
economic reforms-including a reform of producer
prices and factory self-financing measures-be-
cause of fear that some firms would earn exorbitant
profits while others would be forced into bankrupt-
cy. Instead, the government generously subsidized
factories that were technically bankrupt, allocating
46 percent of the national budget for this purpose.
Moreover, to guard against profiteering, the gov-
ernment levied a number of new taxes on enter-
prises-including a progressive income tax ranging
as high as 90 percent-that seriously weakened the
profit incentive. The regime also refused to grant
significant powers to its newly formed trade unions
and workers' councils, largely out of fear that
Solidarity would use them to regain power.F
-0.2 1980 1981 1982
Warsaw had to repay Western creditors $11.2
billion in 1982, including $9.8 billion in debt
service due under original loan contracts and $1.4
billion in unrescheduled obligations carried over
from 1981 and payments due under 1981 debt
relief agreements concluded with private and gov-
ernment creditors. Warsaw was able to pay only
about $2.2 billion and to reschedule less than $3
billion, leaving arrears of $6-7 billion. An agree-
ment with private banks rescheduled 95 percent of
1982 principal obligations-worth $2.3 billion-
and required Poland to pay $1.1 billion interest in
late 1982 and 1983. The banks agreed to provide
Warsaw with one-half the value of interest pay-
ments in short-term credits.
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Poland ended the
year with $4.4 billion in arrears to Western govern-
ment creditors and with limited prospects for a
favorable government rescheduling in 1983.
Less Aid From the East. Poland's reduced levels of
aid from the USSR and the other CEMA countries
in 1982 failed to compensate for reduced Western
inputs. In 1982, the Soviets had planned to allow a
soft currency trade deficit equivalent to $1.6 bil-
lion, but the Poles ran only a $1.2 billion deficit-
$800 million less than in 1981. Moscow also sup-
plied about $44 million in hard currency to buy
Western parts for exports destined for the USSR,
sold raw materials to Poland at favorable prices,
granted a 500,000-ton grain loan, and provided
some above-plan deliveries of materials to boost
production in idle factories.
Poland ran almost balanced trade with its non-
Soviet CEMA partners in 1982. According to the
Polish press, however, Bulgaria and Hungary did
provide Poland with small amounts of hard curren-
cy to buy Western inputs for products exported to
their countries. All East European CEMA coun-
tries, except East Germany, also promised to help
Poland complete major investment projects, but
there were few signs of progress in 1982.
Prospects for 1983
Poland will have difficulty meeting the regime's
modest goals for 1983-2- to 2.5-percent growth in
national income, 3.7-percent growth in industrial
production, and 1.5-percent growth in agricultural
output. Even achieving these targets would recover
only one-fifth of the decline in national income
since 1978. Investment is scheduled to remain at
the low 1982 level.
Warsaw's success in achieving its national income
and industrial production goals this year will de-
pend largely on the country's ability to secure vital
Western imports. If Warsaw imports the same level
of goods as in 1982 and continues to give priority to
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6 May 1983
critical imports for the industrial sector, the coun-
try could meet its industrial growth target. On the
other hand, if Warsaw's trade credits are cut or if it
chooses to pay more of its debt service obligations
by running a larger trade surplus than in 1982, the
necessary import cuts would prevent it from meet-
ing growth targets.
Fulfillment of the industrial plan will be helped by
the government's extension of the workweek to 46
hours in key enterprises, continued militarization of
some enterprises, and encouragement of overtime
in factories with sufficient raw materials. The
planned growth in agriculture, however, will be
difficult to attain because of a likely decline in
livestock numbers and unfavorable winter grain
crop prospects.
One of the regime's major goals in 1983-which it
probably will not reach-is to increase supplies of
consumer goods by 8 to 9 percent, largely through
more efficient management and an extensive raw
material and energy conservation program. At the
same time, the government intends to take some
measures to reduce demand:
? Retail prices are projected to rise 15 percent.
? Pay increases will be held to 16 percent.
? Restrictions will continue on consumer credits.
? Social spending may be cut.
In addition, property taxes-which especially af-
fect private farmers-probably will be raised, and
income taxes will be applied on the wealthy for the
first time.
The Soviet Union has promised to permit Warsaw
to run a trade deficit equivalent to $1.7 billion this
year and to adjust the composition of trade to
Poland's benefit. Moscow intends to import more
Polish machinery and fewer consumer goods and
foodstuffs, while increasing by 15 percent its ex-
ports of industrial materials to Polish industry
Warsaw's huge carryover of arrears will leave
$13.9 billion in debt service due this year, including
$4.4 billion in arrears from 1982, $5 billion in
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principal payments on medium- and long-term
loans under original loan contracts, and about $4
billion in interest, including charges on reschedul-
ing agreements. Even if the Poles run a current
account surplus of $1 billion in 1983, roughly the
same as in 1982, Warsaw would still have a $12.9
billion financing gap. Since the outlook remains
poor for new credits, the 1983 financing require-
ment will have to be covered by debt relief, either
under formal agreements or by creditors' continued
tolerance of arrears.
Longer Term Prospects
Warsaw's massive debt obligations will be a key
constraint on economic growth. The regime will be
strapped for hard currency throughout the 1980s
and will have to make tough choices between
servicing its debts or importing the inputs necessary
for economic growth. Warsaw probably will seek
total debt relief and new credits and, if unsuccess-
ful, will continue the de facto moratorium on debt
service owed to governments. In addition, without
more generous rescheduling terms from Western
banks and an upturn in lending, Warsaw may
choose to extend the moratorium to other types of
debt. With the financial bind continuing, Warsaw
will have little hope for boosting imports, with
consequent negative repercussions on growth pros-
pects.
We believe there is little chance for Poland to
significantly increase hard currency exports. Most
of Poland's manufactured goods already sell for 20
to 50 percent less than similar Western goods, and
the Poles are not having much success improving
product marketability in Western markets. In addi-
tion, output of raw materials-which provided al-
most 30 percent of hard currency earnings in
1981-will increase slowly as a result of the lack of
investment in the raw material sector during the
last five years.
The Poles' current plans to hold down investment
will retard economic recovery in the longer term.
The transportation network, especially the rail sys-
tem, is in serious need of repair. The chairman of
the Sejm Coal Commission has said that hard coal
production will not increase above the 1982 level
through 1990 unless new mines are opened. Domes-
tic oil and gas supplies-which provide a small but
important part of Polish needs-are dwindling.F_
The Poles also have not allocated sufficient funds
for a conservation program to reduce the use of
materials per unit of output. Such a program is
essential to the success of the 1983-85 Plan: one- 25X1
half of the 40-percent growth in industrial produc-
tion through 1990 is projected to come from in-
creased efficiency. The regime will find it difficult
to increase worker productivity because of deep-
seated worker distrust and apathy and because of
the austerity that is expected to last at least until
the end of the decade.
Two other factors-economic reform and Soviet
assistance-could provide some help, but, on the
basis of past experience, we believe there is good
reason to doubt that the benefits will be as great as
the Poles may hope. We doubt that major portions
of the reforms will be implemented soon and
believe that bureaucratic resistance could easily
undermine many reform measures already institut-
ed. The Soviets probably will continue to provide
Poland with raw materials on favorable terms but
will try to trim back other forms of aid because of
their own economic problems
In our view, Poland may be able to achieve small
increases in national income and industrial output
over the next three years, but economic output
seems likely to remain below the 1978 level at least
until 1986. Continually trying to meet the conflict-
ing goals of stimulating economic recovery, paying
creditors, and improving living standards, the re-
gime probably will make only limited progress in
each area
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Sub-Saharan Africa:
Long-Term Food Outlook '
Food has become one of Sub-Saharan Africa's
most pressing problems.' Drought-related crop fail-
ures this year throughout southern Africa and in
Ethiopia highlight once again the precarious bal-
ance between supply and demand in most of the
region. Shortages and price increases have helped
trigger civil disorder in the region in recent years,
and we believe that politically volatile urban Afri-
cans will be even less inclined in the future to
tolerate shortages. Consequently, food problems
will increasingly serve as flashpoints for civil unrest
and as rallying points for challenges to governmen-
tal authority.
Declining Self-Sufficiency
The growth rate of food production in Sub-Saharan
Africa, already the lowest of any region in the
developing world, is declining. The average annual
rate of increase in production in the 1970s was
1.5 percent-down from about 2.0 percent during
the preceding decade and less than half the rate for
all developing countries, according to the World
Bank. Per capita production has dropped even more
as a result of an accelerating population growth
rate. By 1981, overall per capita food production in
the region had fallen 14 percent below the 1969-71
level, according to the US Department of Agricul-
ture; even the most productive countries generally
managed only to record low growth during this
period. The exception is Ivory Coast; per capita
food production there rose 25 percent.
' The term "Sub-Saharan Africa" refers to all of the African
continent with the exception of South Africa and the North African
states with Arab-controlled governments (Algeria, Egypt, Libya,
Indexes of Per Capita Food Production for
Selected Regions, 1972-81
Latin America South Asia
Developed World Sub-Saharan Africaa
The slow growth of food production stems from a
number of factors common to most African states:
? Postindependence African leaders tended to view
the agricultural sector as a source of revenue to
finance industrial development, thus devoting few
resources to the production of food for domestic
consumption.
? The investment that has taken place has tended
to be funneled into large-scale, government-run
operations that have been plagued by poor admin-
istration, overstaffing, and inability to properly
maintain equipment and infrastructure.
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? Official producer prices set low to subsidize
urban consumers have not provided adequate
incentives for increased food production.
? Yields of most major African staples are among
the lowest in the world, largely due to traditional
cultivation methods.
? Drought, floods, crop diseases, and insect infesta-
tions also reduce crop yields.
? Political turmoil associated with guerrilla activity
and refugee movements frequently disrupts nor-
mal planting and harvesting schedules and mar-
keting patterns
Rising Demand
The slowdown in the growth of food output has
coincided with a rapid escalation in demand, due
primarily to the high rate of population growth.
Sub-Saharan Africa's population-estimated by
the UN to have been 330 million in 1980-is
increasing at the rate of about 3 percent per year,
the highest for any region in the world. Urban food
demand is growing most rapidly; the annual urban
population growth rate of 5.9 percent is far out-
stripping the 1.5-percent annual growth rate of
food production. Growing urbanization of the Afri-
can population has created a food demand struc-
ture that is difficult to supply from local resources.
Taste preferences of Africans change when they
move to cities-urban Africans tend to turn away
from local grains, roots, and tubers in favor of
imported foods such as wheat and higher quality
rice.
Growing Dependence on Food Imports
During the 1960s, African governments found that
the food needs of growing urban populations could
be satisfied more easily with cheap imported grains
than with locally produced foods. Subsidies on
imported foods have reinforced consumer prefer-
ence for imported rice and wheat, dampening de-
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6 May 1983
mand for local staples. As a result, imported food-
stuffs have assumed increasing importance in
urban markets as a means of meeting both rising
demand and changing tastes. Grain imports ex-
ceeded 8.6 million tons in 1981, compared with
1.2 million tons in the early. 1960s.
An FAO study of African food purchases indicates
that most imported grain comes from the United
States, Western Europe, Canada, and Australia.
With the exception of South African maize exports,
legal grain trade among African countries is low.
Poor transport links, inadequate storage facilities,
high tariffs, and the lack of foreign exchange are
the primary obstacles. Nevertheless, price differen-
tials between countries spur considerable illegal
grain trading. According to the USDA, for exam-
ple, subsistence crops in Benin and Cameroon are
illegally exported to northern Nigeria.
Paying for imported food has become a significant
burden for the majority of African governments.
We estimate that Africa's food imports in 1982
cost about $5 billion. USDA reporting in 1982
indicates that food imports consumed more than
25 percent of export earnings in The Gambia,
Senegal, Sierra Leone, Somalia, and Togo. As a
result of their increasingly precarious financial
positions, most African nations rely on Western
donors for food aid in the form of concessional sales
or grants. We estimate that 40 African nations
received a total of about $500 million of food aid
from Western donors in 1981. The United States
was the largest single supplier of this assistance,
with over 60 percent of the total.
Government Pricing and Marketing Policies
Since 1980, several countries have reversed course
by raising producer prices of staple foods above
world market levels in order to encourage produc-
tion. Maize farmers in Kenya, Zambia, Tanzania,
and Zimbabwe responded to recent price hikes with
substantial increases in production. Over the longer
term, however, the attractiveness of higher produc-
er prices may be eroded by other factors such as
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Annual Rates of Population Increase for Major
Regions of the World, 1950-2000
Sub-Saharan Africa North America
Latin America Europe
high production costs and lack of necessary materi-
als. In Zambia, where a 15-percent price increase
for maize in 1981 brought about a boost in the
acreage planted, USDA analysts warn that price
incentives could be dampened by shortages of
agricultural materials and equipment, transporta-
tion problems, and scarce credit.
Some governments are trying to stimulate produc-
tion by liberalizing marketing practices and giving
freer rein to private traders:
? Senegal has abolished its official cereals market-
ing board and eliminated government procure-
ment of cereals.
? Mali has relinquished its monopoly control on
sorghum and millet, in partial response to IMF
insistence on grain marketing liberalization as a
precondition for a standby accord.
? In 1981, Somalia abolished several parastatals
and turned their functions over to the private
sector.
? Zambia has reduced the role of its agricultural
marketing board, allowing cooperatives in some
provinces to become the official maize buyers. 25X1
? Upper Volta's grain marketing parastatal has
attempted to encourage production by setting
floor prices for grain and sorghum higher than
those offered by private traders and by entering
the market only when it can offer a better price
than private traders
Constraints on Future Food Production
We believe that the financial, physical, and human
resource problems that have constrained African
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Per Capita Food Self-Sufficiency Average Daily
Production, in Grain a Per Capita
Annual Average Annual Average Caloric Intake
Annual Average 1976-78
(thousand tons)
1981 (thousand tons)
1979-81 (Index:
1979-81
as a Share of
Grain
Food
PL 480
Grain
Food
PL 480
1969-71=100)
(percent)
Requirements,b
Imports
Aid,
Aid,
Imports
Aid,
Aid,
1976-78
Grain
Grain
Grain c
Grain d
(percent)
Total NA NA NA 3,549.9 876.4 248.5 8,629.3 1,459.2 899.7
Angola 72 58 69 153.7 8.0 1.2 244.3 21.8 4.1
Botswana NA 37 73 39.5 e 5.9 5.5 57.8 0 0
Burundi 90 94 106 30.5 7.8 3.1 18.5 7.2 7.2
Cameroon 98 87 101 104.6 4.8 2.5 106.0 10.1 7.7
Cape Verde NA 7 77 NA 34.8 11.9 46.5 36.0 20.9
Central African NA 89 98 11.5 1.4 0.8 13.4 0.9 0.9
Republic
Chad NA NA 76
Comoros NA NA NA
Congo NA 21 95
Djibouti NA NA NA
Equatorial Guinea NA NA
Ethiopia 68 94
Gabon NA 24 NA
The Gambia NA 62 101
Ghana 69 76 84
Guinea 95 77 83
Guinea-Bissau NA 62 100
Ivory Coast -125 66 116
Kenya 99 91 96
Lesotho NA 71 95
Liberia 104 70 97
Madagascar 88 91 107
Malawi 99 97 93
Mali 80 94 76
Mauritius NA 1 NA
NA
70.3 f
27.6
40.9
211.9
54.8
NA
243.3
43.1
63.3
61.3
174.6
40.2
30.8
NA
Mozambique 73 56 73 192.0
32.0 0.9 0.9
55.9 0.8 0.8
NA
NA
5.3
0.4
0
102.3
18.5
207.3
114.3
10.0
NA
0.1
34.7
0
0
10.5
3.2
48.4
5.0
1.2
63.8
15.0
256.0
52.7
42.5
39.3
7.8
134.2
29.9
22.2
27.7
6.1
26.5
12.6
10.1
NA
0.4
619.3
NEGL
NEGL
8.8
3.1
533.9
173.7
134.4
19.1
13.0
95.1
28.0
23.2
1.2
0.6
110.9
31.9
31.3
9.3
1.3
267.8
28.9
17.9
2.6
0.6
113.3
14.5
14.4
26.5
7.9
101.6
28.6
0
NA
NA
175.3
13.1
13.1
101.8
8.2
367.9
53.9
20.0
Namibia NA NA 95 NA NA NA NA 0 0
Niger 104 83 85 23.4 43.2 12.9 89.1 7.6 2.6
Nigeria 85 82 86 925.0 0.4 0.4 2,440.5 0 0
Rwanda 108 70 82 6.5 12.8 4.5 15.9 8.3 5.4
Sao Tome and NA I 1 NA NA NA NA 7.9 1.1 0.4
Principe
Secret 22
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Sub-Saharan Africa: Food Supply Indicators (continued)
Per Capita Food Self-Sufficiency Average Daily Annual Average 1976-78 1981 (thousand tons)
Production, in Grain a Per Capita (thousand tons)
1979-81 (Index:
1979-81
as a Share of
1969-71=100)
(percent)
Requirements,b
1976-78
(percent)
Sierra Leone
Somalia
Swaziland
Tanzania
Upper Volta
Zaire
Zambia
Zimbabwe
86
45
83
88
85
97
94
66
73
105
a Percent of grain self-sufficiency = (grain production)/(grain
production + net grain imports) x 100.
b Per capita food intake was calculated as the quantity of food
available for human use at the retail level after provision was made
for change in food stocks and the supplies of food traded, fed to
livestock, used as a seed or for individual purposes, or lost in
collection, processing, or marketing. Recommended caloric intakes
are those established by FAO and WHO in 1973.
e Includes aid only from signatories of the Food Aid Convention of
agriculture during the past two decades cannot be
redressed significantly during the rest of the 1980s:
? Modern agricultural materials and equipment,
such as imported seeds, fertilizers, chemicals, and
machinery, are too costly for most farmers, and
budgetary problems will constrain government
subsidization of such materials.
? The continuing migration of young males to
urban areas will raise rural wage rates, pushing
up production costs.
Grain Food PL 480 Grain Food PL 480
Imports Aid, Aid, Imports Aid, Aid,
Grain Grain Grain c Grain d
NA NA NA
37.7 8.5 4.1 h
73.9 1.2 e 12.2
13.0 r NA 0.5
108.1 108.1 25.1
NA 12.0 8.1
15.3
39.0
381.6
61.8
0.1
35.8 20.2
29.3 1.1
17.4 2.3
6.9
1.3
0.5
57.5
10.9
6.9
432.0
203.3
142.0
20.0
0.3
0.3
265.0
195.5
104.4
62.0
2.0
2.0
36.9
37.6
29.7
71.4
34.3
25.3
538.3
64.2
56.2
295.0
101.4
73.4
1980. FAC members include Argentine, Australia, Austria, Cana-
da, the European. Economic Community, Finland, Japan, Norway,
Spain, Sweden, Switzerland, and the United States.
d October 1980-September 1981.
e 1976-77 average.
r As reported. Actual quantities are probably higher.
g Figure does not include $1.3 million of commodities for which the
tonnage is unknown.
? African governments will have difficulty funding
the research necessary to adapt high-yield tech-
nology to local conditions and will have trouble
supporting extension services to disseminate this
technology to farmers.
? An inadequate system of transport and storage
facilities will hinder the marketing and distribu-
tion of both foodstuffs and agricultural materials.
investment.
? The potential for increasing food production by
bringing new land into cultivation is large, but
preparing these lands will require high levels of
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We believe that conditions in Africa over the next
decade do not favor a "Green Revolution" in food
production such as occurred in Asia in the 1960s.
The Green Revolution was made possible by a
combination of factors: the existence of an exten-
sive irrigation network, the development of high-
yield varieties of rice and wheat suitable to areas
with access to controlled water supply and fertiliz-
er, and relatively good transportation links between
producers and markets. None of these conditions
currently exist in Africa. In addition, development
of high-yield plant varieties suited to African rain-
fed agriculture must take into account widely
varying soil and climatic conditions. Rice breeders
have developed some suitable high-yield varieties,
but, according to the USDA, their use is limited by
disease and other environmental problems. Neither
does the USDA foresee a technological break-
through for millet or sorghum. Use of existing
improved plant varieties is hampered by the logistic
difficulties in distributing hybrid seeds, adultera-
tion of seeds by farmers, and storage problems. F_
Government Options Limited
We believe that African governments face difficult
policy choices in the years ahead as they attempt to
ensure adequate food supplies, reduce import de-
pendence, and lower consumer subsidies. Although
African leaders are likely to try to solve their food
problems by allocating an increasing share of in-
vestment to food crop production, we believe that
severe financial constraints associated with slowed
economic growth and rising trade deficits will
sharply limit spending. Moreover, decisions on how
to allocate scarce resources will require tough
choices between export-oriented cash crops-im-
portant sources of foreign exchange-and import
substitution programs in the food sector.
Perhaps most difficult, in our judgment, are the
politically risky pricing and trade policy reforms
necessary to improve incentives to farmers, because
such reforms will come at the expense of urban
consumers. We believe that African leaders prefer
Secret
6 May 1983
not to antagonize urban residents by lowering food
subsidies, despite recommendations by economic
advisers and foreign creditors. Governments that
have little choice but to lower consumer subsidies
may still try to protect the interests of key groups,
such as the military. Mali, for example, has loos-
ened its control on grain marketing and has raised
consumer prices, as stipulated in an agreement with
the IMF, but noted in late 1981 that it would still
try to provide cheap grain for certain categories of
public employees.
Impact on Import Requirements
Barring major changes in policies, we believe that
food imports will have to increase substantially to
satisfy politically important urban consumers. The
USDA, FAO, and the International Food Policy
Research Institute have projected that annual de-
mand for food imports in Africa will reach 10-12
million tons in 1990 if production and consumption
trends of the 1970s continue. We believe that
import requirements could be even higher. Accord-
ing to FAO, grain imports totaled 8.6 million tons
in 1981, compared with 3.5 million tons annually,
on average, during 1976-78.
The ability of Africans to pay for food imports will
be limited by increasing financial problems. Rely-
ing on international financial institutions for fund-
ing is, in our opinion, not a realistic alternative. The
IMF decided in May 1981 to extend its compensa-
tory financing facility to provide assistance to
members having balance-of-payments difficulties
as a result of increasing costs of cereal imports.
Malawi and Kenya have been helped by the pro-
gram, and we anticipate that other African states
will also turn to the IMF for assistance. The
facility's resources are too limited, however, to
cover more than a fraction of the region's food
needs.
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Implications for the United States
We believe that few African countries will escape
food shortages in the 1980s. Urban Africans, in-
creasingly beset by rising prices and declining
living standards, will be especially hard hit. Food
supply problems are likely to serve as flashpoints
for urban unrest. Even if violence does not erupt, a
serious food shortage could become a rallying point
for political opposition.
We believe that African leaders will look increas-
ingly to external sources-particularly the United
States-for food and for financial and technical
assistance in building domestic food production
capabilities. Governments may interpret the nature
of Washington's response as a gauge of our com-
mitment to Africa's needs. US relations with stra-
tegically important countries such as Nigeria,
Kenya, and Somalia could be weakened if Wash-
ington is not viewed by their leaders as sensitive to
their food needs. Kenya's President Moi and Soma-
lia's President Siad, for example, place particular
emphasis on US food aid, and their anxieties about
the usefulness of their decision to open their mili-
tary facilities to US forces may increase if they
believe US food aid, as well as other assistance, is
inadequate. Nigeria, whose membership in OPEC
precludes its qualifying for PL 480 aid, will be in
the market for other kinds of financial assistance to
help cover its food gap. Embassy reporting indi-
cates that the request might include a barter
arrangement involving US food and Nigerian oil or
concessional financing of US agricultural invest-
25 Secret
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Secret
Oman: Adjusting to
Declining Oil Revenues
Oman-dependent on oil for the bulk of govern-
ment revenues-is likely to run budget and current
account deficits in 1983. Revenue shortfalls could
stimulate domestic criticism of high defense expen-
ditures and the role of foreigners-especially the
British-in Oman. Omani planners have yet to cut
government spending much. Oman will probably
adhere to current welfare, development, and de-
fense plans unless there is a further decline in oil
prices. To shoulder some of the burden of these
expenses, Oman is likely to seek additional econom-
ic assistance, especially from its richer Gulf neigh-
bors and the United States. Even if aid does not
materialize, we believe that Oman is still in a good
position to weather the downturn in the world oil
market. Oman could draw down its foreign as-
sets-estimated at about $4 billion, or borrow on
the international market.
Oil provides about 85 percent of total government
revenues and over 60 percent of Oman's GDP.
Proved recoverable reserves are 2.7 billion bar-
rels-enough to last about 20 years at current
production rates of between 350,000 and 370,000
b/d. Oman exports nearly all of its crude produc-
tion, about one-half to Japan. According to a well-
informed source, Oman plans to increase its crude
production to help offset the downturn in oil prices,
but increased oil production much over present
levels is constrained by pipeline capacity-estimat-
ed to be about 390,000 barrels per day-and
bottlenecks in the system. Thus, if oil prices contin-
ue to fall, so too will Oman's revenues. We estimate
that for each $1 decline in the price of oil, Oman
stands to lose close to $130 million in earnings from
oil exports.
Oman: Oil Production and Exports
Crude Oil Production
Thousand barrels per day
Despite a projected 15- to 30-percent decline in oil
revenues in 1983, we project that government
spending will rise by almost 8 percent to about $4.4
billion-an indication of the government's unwill-
ingness to cut spending for military programs,
economic development, and social welfare. Sultan
Qaboos continues to give defense the highest priori-
ty-40 percent of budgeted expenditures-because
of potential threats from South Yemen and Iran.
Qaboos also has increased spending on social pro-
grams and economic development an average of 25
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Iran/ Jaz;, 4-
Ash Shara,4a
Dub'q
M y$,~ y~ ~~t I
w i
ABU DHABI
Saudi Arabia
4ar
People's Demo cr tic I
Republic of Yenien \
- (S. Yemen)
Thumrait
\O F A R
Raysdt.r
zWefJIzki
/Ghabah
^~.__ j Ii'rayya
akkin
International boundary
Administrative line
Road
Boundary representation is
not necessarily authoritative.
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;e fi ~fi R
limm~al ~,~?
01,
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Other (includes 58 250 147 378 147
grants and de-
velopment loans)
:nditures 954 1,435 1,682 1,547 1,621
Defense and na- 341 698 785 686 767
Civil purpose 553 660 820 773 704
(mainly social
welfare and de-
velopment
spending)
Domestic net lending 117 -3 1 23
and equity participa-
tion
2,184
1,839
3,277 4,384 4,366 3,855 3,345
502 583 540 459 383
a Estimated.
b Projected. Revenues based on an oil price of $28 to $30 per barrel.
c Projected. Revenues based on an oil price of $25 per barrel.
d Excludes transfers and allocations to the General Reserve Fund.
percent annually in recent years to promote domes-
tic stability-especially in politically vulnerable
areas such as Dhofar, Muasandam, and the
interior.
Oman's economic growth in 1983-barring a fur-
ther sharp drop in oil prices-is likely to slow to
about 5 percent compared to over 30 percent in
recent years. Senior Omani officials are aware that
a return to the rapid growth of the late 1970s is
unlikely. We believe that slower growth need not be
politically threatening, however, if the government
maintains its social programs.
e Approximately 15 percent of oil income is diverted into the State
General Reserve Fund, established in 1980.
f Petroleum Development Oman (PDO).
Deficit Scenarios and Funding Options
If oil prices stabilize between $28 and $30, we
estimate that Oman would have a small surplus on
its current account or run only a small deficit. The
budget would run a deficit of almost $800 million
on expenditures of almost $4.4 billion-a signifi-
cant turnaround from last year's budget surplus of
about $60 million. Oman last had current account
and budget deficits in 1978.
Gulf Assistance. Oman probably would seek addi-
tional assistance from Arab sources-particularly
the Gulf Cooperation Council-to soften the im-
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pact of lower revenues. The GCC has already
agreed in principle to grant Oman $1.8 billion over
the next 12 years to purchase military equipment.
Oman, however, probably will not receive the entire
amount because the Gulf states will be constrained
by their own cash-flow problems.
In addition to possible GCC military aid, we
estimate that Oman can look for at most $100
million in development aid from Arab donors in
1983. The Saudi Fund for Development has al-
ready approved loans totaling $16 million to fi-
nance two projects-a technical institute and a
vocational training center-both located in the
interior. At least two other projects for the Dhofar
region may receive Saudi aid.
Turning to the United States. We believe Oman
will seek additional financial assistance from the
United States, citing Oman's reduced revenues, its
role as a reliable military partner, and its increased
importance to security in the Persian Gulf region,
including the strategic Strait of Hormuz. Accord-
ing to the US Embassy in Muscat, the United
States has provided $40 million in Foreign Military
Sales credits for the 1983 fiscal year, $10 million in
Economic Support Fund loans, $5 million in ESF
grants, and $100 million in International Military
Education Training grants.
Other Options. Oman-with a debt service ratio of
less than 6 percent-could easily borrow on the
international market. Oman is reportedly consider-
ing a $300-400 million Euromarket loan, in part to
establish its credit rating for future contingencies.
A decision on whether to go ahead is expected
within the next five months. Oman last went to the
Euromarket in 1979 when it received a $200
million medium-term loan.
Oman could also draw on its official foreign assets.
We estimate Oman's official assets to be about $4
billion (including net commercial bank assets),
about one year of imports of goods and services.
Oman has drawn on its reserves several times in the
past, most recently in May 1982. Faced with
liquidity and cash-flow problems because of oil
Secret
6 May 1983
revenue shortfalls, the government then withdrew
deposits from the Sultanate's commercial banks.[_
If oil prices drop to $25, we estimate that Oman
would run a current account deficit of about $400
million and a budget deficit of $1.3 billion. Funding
such large deficits would quickly deplete Oman's
assets. Although Oman probably would increase its
requests for foreign aid under this scenario, we
believe the government is not likely to receive much
over the $400 million it is already getting from
Arab donors and the United States.
Foreign exchange difficulties caused by a sharp
drop in oil prices could be used by the government
to justify tough spending reforms, but this would
not be well received by most Omanis. So far,
Qaboos has not prepared the public for harsh
austerity measures. Revenue shortfalls would most
likely touch off intense competition for resources
and stimulate criticism of high defense expendi-
tures and the role of foreigners in the Omani
military, political, and economic system.
Spending Cuts. With $25 oil, Oman would proba-
bly be forced to make deep cuts in spending. Omani
leaders, however, would be loath to cut social
welfare and economic development programs, each
making up about 25 percent of the budget. They
are concerned about Omani discontent over un-
equal distribution of wealth between the relatively
rich capital and coastal areas, and the less devel-
oped interior and the Dhofar. Cuts in development
projects would be likely to increase popular criti-
cism of official corruption and perhaps Qaboos'
extravagent palaces and lifestyle. Cuts in imports
of consumer goods could be politically destabilizing
among Omanis accustomed to fast-paced growth
and improving living standards.
Military cutbacks are unattractive to Qaboos but
are a more likely target for economies in an era of
reduced revenues. Oman's allocation of 40 percent
of its budget to military and security spending is
one of the highest in the world in both percentage
and per capita terms. Oman would be reluctant to
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Services and private -444
transfers
-558
Grant receipts
24
207
52
268
20
179
102
145
72
200
200
Current account
180
56
42
302
-69
509
1,152
1,327
872
190
-410
a Estimated.
b Projected. Data based on an oil price of $28 to $30 per barrel.
c Projected. Data based on an oil price of $25 per barrel.
cut the size of its armed forces or reduce their
funding because of perceived threats from South
Yemen and Iran and the risk of provoking dissi-
dence in the military. Nonetheless, delay or even
elimination of some weapons purchases probably
would be made, particularly if revenues declined
significantly. Failure to cut military spending
would expose the government to popular criticism
for slighting civilian needs.
We believe the government probably would be able
to minimize popular dissatisfaction in the near
term. If the economic downturn continues beyond
1983, however, the government would be forced to
adopt even tougher measures, creating a potential
for political unrest.
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Morocco: Mounting Financial
Problems
Hit in recent years by the depressed phosphate
market and a severe drought, Morocco resorted to
foreign borrowing to cover growing current account
deficits. As a result, foreign debt has doubled and
the debt service ratio is approaching 50 percent.
With meager foreign exchange reserves and the
country's creditworthiness in doubt, King Hassan
may be forced to come to terms with the IMF and
is likely to press the United States for additional
assistance. Dealing with the country's serious fi-
nancial situation may preclude significant econom-
ic growth or improvement in the standard of living,
and Hassan may have to rely more heavily on his
security forces to maintain order.
The collapse of the phosphate market-Morocco's
major export commodity-in 1976 constrained ex-
port earnings. High defense costs related to the
Saharan conflict and a severe drought in 1980-81
boosted the import bill. Import volume remains at
about the 1978 level despite the massive food
imports of recent years; maintaining even this level
of imports, however, was made possible only by
generous assistance from Saudi Arabia and heavy
foreign borrowing. Foreign debt reached $10 billion
at the end of 1982, equivalent to two-thirds of GDP
and double the 1978 level. As a result of this
rapidly growing debt, Morocco's debt servicing
costs reached 39 percent of receipts from goods and
services last year and is expected to reach 46 per-
cent this year. Foreign exchange reserves have been
depleted to the point where they now cover less
than one week of merchandise imports.
The austerity measures imposed in 1978 and a
severe drought in 1980-81 combined to slow eco-
nomic growth and to produce widespread unem-
Morocco: Foreign Financial Indicators
Foreign Exchange Reservesa Debt Service Ratio
Million US $ Percent
0 1978 79 80 81 82 83b 0 1978 79 80 81 82 83b
a End of period, excluding 704,000 ounces of gold.
b Projected.
ployment, and added to urban economic malaise.
Real GDP growth has averaged only 2.8 percent
since 1978 in sharp contrast with the heady 7.0-
percent growth of the previous five-year period.
Unemployment in major cities approaches 25 per-
cent, according to Embassy reporting. Double-digit
inflation has wiped out wage increases in recent
years.
The nation's five-year development plan (1981-85) 25X1
has suffered a serious blow because of the foreign
exchange shortage and is in danger of being
scrapped. Investment under this plan is already far
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behind schedule. The modern sector, such as con-
struction and manufacturing, has been especially
hard hit.
1982: A Weak Recovery
Agricultural production rebounded sharply in 1982
as the most severe drought to hit Morocco in 40
years was finally broken. A near-normal cereal
harvest of 4 million tons was achieved-double the
production in 1981. Improvement in this sector-
three-fifths of the population is involved in agricul-
ture-related activities-was the primary cause of
the 4-percent gain in real GDP. Other sectors
showed little gain, however, with output in the
mining sector declining sharply due to the soft
world phosphate market.
Declining phosphate revenues and the continued
need to import large amounts of grain to replenish
stocks increased the current account deficit to
$2 billion. Rabat was forced to trim its phosphate
rock prices by 19 percent to $40 per ton during the
year; as a result, foreign exchange earnings from
phosphate exports dropped by $200 million. Petro-
leum imports consumed 56 percent of export earn-
ings
Morocco relied heavily on foreign borrowing again
in 1982 to finance its current account deficit, in
part because support from Riyadh dropped by half
to $350 million. Rabat was forced to negotiate a
one-year, $560 million standby and cereals option
loan with the IMF in April 1982. In addition,
$94 million in economic and military assistance
was provided by the United States in 1982
1983: Tenuous Prospects
While agriculture is picking up, Rabat is still
struggling with the impact of depressed phosphate
earnings and the payments required to service past
borrowing. If Morocco is able to reach a new
standby agreement with the IMF and line up
Secret
6 May 1983
the country's weak financial position.
bilateral support, the nation's economy should be
able to repeat last year's performance. There are
considerable downside risks, however, because of
Baseline Scenario. Despite austerity measures and
the depressed phosphate market, agriculture's con-
tinued improvement will probably allow Morocco
to repeat last year's 4-percent economic growth. As
the country continues to recover from the effects of
drought, the grain harvest should reach 4.5 million
tons-12 percent above last year-and exports of
citrus should grow by 11 percent. The construction
and chemical industries will show some improve-
ment, but growth in other sectors will remain slow.
The government budget will provide little stimulus
this year, since planned expenditures remain about
the same in real terms. New import controls and
restrictions in foreign currency transactions, how-
ever, will limit revenue growth, causing the budget
deficit to increase by about $170 million. Lower
import prices and reduced consumer demand
should help slow inflation to about 13 percent.
Morocco's phosphate industry, which accounts for
8 percent of GDP, remains depressed. Phosphate
rock sales-29 percent of export earnings in
1982-are unlikely to increase from the reduced
level of 16.5 million tons shipped last year. Rabat
may be forced to cut rock prices further to preserve
its market share
Such a cut would reduce export earnings, offsetting
savings from the $5-per-barrel drop in oil prices.
Earnings from processed phosphates-16 percent
of exports last year-have remained firm
Despite import controls, we believe that the current
account deficit will most likely show only a modest
improvement to $1.9 billion in 1983. Although
import volume will decline slightly with consumer
and capital goods being hardest hit by import
controls, exports will remain stagnant. About $2.7
billion will be necessary to cover the current ac-
count deficit and debt repayment-bilateral loans
will probably be the primary source of funds since
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Secret
Current account balance b
Merchandise trade balance
Exports, f.o.b.
Phosphates and derivatives
Imports, f.o.b.
Fuel and lubricants
1,565
1,336
1,997
744
3,333
638
-215
Receipts from tourism
290
333
Worker remittances
735
957
Private transfers (net)
13
-14
Private loans (net)
-28
115
Official grants
NEGL
430
Public-sector loans (net)
1,369
965
IMF drawing (net)
70
-29
Other flows, errors, and omissions
50
19
Change in reserves
113
-65
a Projected.
b Balance before official grants.
commercial lenders are leery of increasing their
exposure. French support has been increased to
$272 million this year from $195 million in 1981.
Reduced oil revenues, however, will probably pre-
clude an increase in Saudi assistance.
Worst Case Scenario. There is, however, a strong
and growing chance that Morocco will not be able
to secure all of the required financing. Agreement
on a new IMF loan for 1983 may prove difficult.
Failure to address food subsidies-a politically
sensitive issue-the growing budget deficit, and
insufficient progress on reducing the current ac-
count deficit have impeded progress to date. Talks
aimed at assessing a new program may resume in
-1,469
-1,893
-2,057
-1,884
-1,584
-1,381
-1,557
-1,772
-1,580
-1,280
2,425
2,283
1,960
1,970
1,970
1,009
1,080
874
756
756
3,806
3,840
3,732
3,550
3,250
1,012
1,200
1,099
993
993
-96
-361
-313
-330
-330
356
338
340
350
350
979
963
992
1,020
1,020
8
25
28
26
26
1,330
1,723
2,046
1,782
1,482
-115
47
50
45
45
97
314
230
250
250
1,181
1,238
1,212
1,138
1,038
127
164
442
300
100
40
- 40
112
49
49
-139
-170
-11
-102
-102
May. We believe Morocco will need about $300
million in IMF funding this year. Debt service costs
will rise 24 percent this year to $1.7 billion and will
continue to rise through 1986 even if the outstand-
ing foreign debt remains constant.
If Rabat is unable to secure sufficient financing,
large cuts in imports and government spending will
be necessary. Assuming a $300 million shortfall,
import volume would have to be cut by an addition-
al 8 percent to make up the difference. The addi-
tional cut in imports, especially capital goods, could
cause economic growth to plunge and social discon-
tent could easily increase. Failure to reach an
agreement with the Fund could also result in
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a Projected. Worst case for import volume assumes $300 million
shortfall in financing in 1983.
bankers' being even more unwilling to provide new
loans to Rabat. Under these circumstances re-
scheduling of part or all of Morocco's outstanding
debt obligations would likely become necessary.
The government is already considering new auster-
ity measures to deal with its growing financial
problems, according to Embassy reporting. The
budget may be reduced with investment again
taking the sharpest cut, as it did in 1982. Harsher
import controls and more stringent restrictions on
foreign currency transactions may be implemented
to stem the outflow of scarce foreign exchange.
Such measures, if enacted would cause a rapid
economic slowdown and raise the prospect of popu-
lar disgruntlement
Secret
6 May 1983
Domestic Political Implications
King Hassan's position appears secure for the near
term if our baseline scenario holds. The potential
for rapid financial and economic deterioration,
however, make his longer term position increasing-
ly less secure. Under the worst case scenario, the
government's ability to meet the growing demands
of the large and youthful population would be
sharply curtailed. The potential for a rise in public
and political unrest would be greatly increased,
forcing Hassan to rely heavily on his security forces
to maintain order.
Criticism of the regime's economic policies has
grown among labor unions, students, and the unem-
ployed. Despite the King's crackdown following the
June 1981 riots in Casablanca, these groups still
have the potential to cause problems. The King's
reluctance to entertain criticism and advice-
especially on the economy-and his preoccupation
with foreign policy concerns have contributed to his
growing isolation and increase the risk that effec-
tive measures will not be implemented. Hassan will,
in any case, probably delay taking significant ac-
tion on the economy until after parliamentary
elections scheduled for later this year.
Hassan continues to have the support of Morocco's
military and security services. Military morale,
however, could be adversely affected by a sharp
reduction in defense spending or a cut in Saudi
support for the Saharan conflict. A further decline
in the standard of living within the officer corps
could also reduce morale and cause disgruntlement.
In addition, a Saharan settlement perceived to
concede too much in diplomatic terms could cause
discontent within the military and would have to be
balanced against any financial resources that a
settlement might release.
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Morocco's burdensome trade position has resulted
in some Moroccan officials pressing for expanded
trade with Eastern Europe and the Soviet Union.
While such trade is currently limited-7 percent of
imports and 11 percent of exports in 1982-pros-
pects are good for increased barter trade in phos-
phates, citrus, and agricultural goods. Eastern
Europe is also viewed as a source of technical
assistance with attractive credit terms for major
development projects. To date Hassan has opposed
stronger trade ties with Communist countries but
may be forced by economic conditions to capitu-
late.
Rabat's weakened financial position and the lower
level of Saudi aid expected this year impairs the
nation's ability to meet arms contract payment
obligations. Morocco is already about $46 million
in arrears to the United States for FMS payments:
Rabat failed to pay a requested $10 million install-
ment by 31 March under a compromise arrange-
ment and now faces a suspension of its $23 million
FMS allocation for FY 1983 under the Brooke
Amendment. An additional $18 million in out-
standing FMS loans must be repayed by the end of
the fiscal year. Military payment obligations to the
French have also begun to mount despite a rollover
of such debts in 1982
The government may petition the United States to
influence the IMF on Rabat's behalf to secure
additional balance-of-payments support. Resched-
uling of Morocco's FMS arrearages may also be
raised. Rabat is interested in acquiring additional
US support for the development of its agricultural
and fisheries resources. In addition, support for
Rabat's attempt to attract US investment may be
requested. Should economic growth decline sharply,
closer US-Moroccan ties, while initially well received,
could become the focus of opposition rhetoric from
dissatisfied elements-including the military-who
would blame the King for failing to obtain sufficient
US economic concessions to keep Morocco afloat.
Secret
6 May 1983
Sanitized Copy Approved for Release 2011/01/12 : CIA-RDP84-00898R000200050005-5
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Sanitized Copy Approved for Release 2011/01/12 : CIA-RDP84-00898R000200050005-5
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Sanitized Copy Approved for Release 2011/01/12 : CIA-RDP84-00898R000200050005-5
Secret
Sanitized Copy Approved for Release 2011/01/12 : CIA-RDP84-00898R000200050005-5