INTERNATIONAL ECONOMIC & ENERGY WEEKLY 27 MAY 1983

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP84-00898R000200080003-4
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 42
• Document Creation Date: December 22, 2016
• Document Release Date: November 2, 2010
• Sequence Number: 3
• Publication Date: May 27, 1983
• Content Type: REPORT

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Intelligence
International
Economic & Energy
Weekly
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DI IEEW 83-021
27 May 1983
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Weekly
International
Economic & Energy
Perspective-What Syria Wants
USSR and Eastern Europe: Early Grain Crop Prospects
Energy
International Trade, Technology, and Finance
National Developments
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Lebanon: Economic Consequences of a Negotiated Settlement
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Jordan: Coping with Slower Economic Growth
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directed to
]Directorate of Intelligence
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Comments and queries regarding this publication are welcome. They may be
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27 May 1983
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International
Economic & Energy
Weekl
Synopsis
Perspective- What Syria Wants
A combination of political assurances by the United States and Lebanon and
financial compensation-presumably from Saudi Arabia-will probably be
required to get Syrian troops out of Lebanon. 25X1
Lebanon: Economic Consequences of a Negotiated Settlement
The vitality of Lebanon's predominately trade- and service-based economy
depends heavily upon Beirut's relations with its Arab neighbors. Arab reaction
to the Lebanese-Israeli accord on foreign troop withdrawals could have a
significant impact on these vital links. 25X1
Jordan: Coping with Slower Economic Growth
The rapid growth in Jordan's key sources of foreign exchange is grinding to a
virtual halt, reinforcing King Hussein's reluctance to take foreign policy
measures-such as negotiating with Israel-not supported by Saudi Arabia
and his other Arab financial backers.F______1 25X1
Decades of rapid population growth, inadequate maintenance, and insufficient
investment have produced a public services crisis of major proportions in
Cairo. The problems caused by unreliable or inadequate water, electrical,
waste disposal, and transportation systems are constant sources of frustration
to Cairenes, impede commerce and investment, and could ultimately spark
serious outbreaks of domestic unrestl 25X1
North Yemen: In a Financial Bind I 25X1
North Yemen has been living beyond its means for several years, as evidenced
in recurring budget and balance-of-payments deficits. Virtually any economic
retrenchment or measures to raise additional revenue, however, risk social
discontent and erosion of the regime's already narrow political base.
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USSR and Eastern Europe: Early Grain Crop Prospects
Both the Soviet Union and Eastern Europe appear headed for good grain crops
this year. Continued favorable weather could result in a 220-million-ton
harvest in the USSR, while the East European crop could reach 96-100 million
tons-only slightly below last year's record. Neither region, however, has
much chance of reaching planned targets of 238 million tons for the USSR
and 112 million tons for Eastern Europe.
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International
Economic & Energy
Weekly
27 May 1983
Perspective
What Syria Wants
A combination of political assurances by the United States and Lebanon and
financial compensation-presumably from Saudi Arabia-will probably be
required to get Syrian troops out of Lebanon. While financial incentives alone
will not entice Syria to withdraw, President Hafiz al-Assad will certainly
demand recompense if and when he decides it is in Syria's best interest to with-
draw. Meanwhile, Assad's pretensions to Arab leadership suggest that Damas-
cus will continue to vigorously lobby for moderate Arab support of its point of
Despite Syria's dependence on Arab financial assistance-about $2 billion
annually over the past several years-Damascus continues to cut a politically
independent path. Assad knows from past experience that the Arabs-
especially the Saudis who provided $1.2 billion last year-are much more 25X6
likely to pony up additional funds to try and sway him than cut off aid.
Soviet and Iranian military and economic
yearly on easy terms in exchange for Assad's support against Iraq
support further weakens Arab ability to influence Assad on basic security
issues. Soviet weapons deliveries are unlikely to be affected by near-term
Syrian inability to pay, and Iran already supplies Syria with $1.4 billion of oil
None of the other moderate Arab states have leverage with Damascus that 25X1
could produce an about-face. Jordan's relations with Syria remain strained
despite recent efforts by both countries to improve them. Egypt's support of
the Lebanese-Israeli agreement carries no weight with the Syrians. Relations
with Egypt have been poor since Sadat's visit to Jerusalem.) 25X1
on negotiations toward Syria's recovery of the Golan Heights.
Assad will undoubtedly demand strong political assurances from Lebanon and
the United States to withdraw from Lebanese territory. He will require
assurances that Syria's security interests in Lebanon will not be jeopardized
and specifically will probably demand the same security arrangements gar-
nered by the Israelis. Such arrangements may have to include a Lebanese
commitment to grant special customs treatment to Syria and assurances that
Lebanon will not agree to full normalization of relations with Israel. Assad is
also likely to press for a commitment from the United States to move forward
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A Syrian decision not to pull out would set the stage for de facto partition of
Lebanon, with the Israelis probably withdrawing south to the Awali River.
Under these circumstances the Gemayel government would continue to
function as long as serious factional violence did not erupt around the Beirut
area, and reconstruction of the Lebanese economy would probably be able to
proceed on a limited basis. Industry in the northern region around Tripoli-
controlled by Syria-and agriculture in the Israeli-held south would probably
continue to be depressed, however. An escalation of factional strife would, of
course, postpone economic reconstruction indefinitely
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Energy
Spot Oil Market Spot crude oil prices have softened in recent weeks, reversing an April rebound
Trends when many prices reached near official levels. Arab Light is now selling at
$28.50 per barrel, $0.50 under its official price of $29.00. Nigeria's Bonny
Light is selling at $29.80 per barrel versus its official price of $30.00. Spot
prices have probably weakened in response to declining spot product prices,
increased OPEC production, and rumors of an increase in Soviet spot product
sales in Western Europe. Spot crude oil prices probably will continue to
fluctuate in coming weeks as buyers attempt to gain a clearer reading of
consumption trends, inventory requirements, and OPEC production intentions.
25X1
Nigerian Oil Official Nigerian oil production figures confirm an earlier US Embassy 25X1
Production Climbs estimate that May production has jumped to about 1.7 million b/d-up over
500,000 b/d from April. an
aggressive marketing drive by the Nigerian National Petroleum Corporation
has led to a sharp increase in direct sales. Production at this level, however, vi-
olates Nigeria's OPEC-mandated ceiling by 400,000 b/d and could strain
OPEC's tenuous production and pricing accord. Lagos has already drawn fire
from the OPEC Monitoring Committee for exceeding its quota.
Soviet-Norwegian US Embassy sources report that a Soviet ship has begun oil-drilling operations
Dispute Over Oil- in an area estimated to be 1.5 nautical miles inside the disputed Soviet- 25X1
Drilling Rights Norwegian area of the Barents Sea continental shelf. Because Norway
considers its equidistant maritime boundary to contain at least a 2-mile error,
it is not contesting the current Soviet operations, although the Norwegian
Coast Guard is closely monitoring activities in the area. If the Soviets move
farther into the disputed area thereby threatening the delicate balance
between the two countries, Norwegian authorities reportedly would consider
similar drilling activities in the region 25X1
Norway maintains that the continental shelf boundary should be a median line
equidistant between its mainland and island territories and those of the USSR.
The Soviets continue to claim a boundary line north to the Pole from its
territory which encloses everything to its east in an Arctic "sector" claim. This
places some 150,000 sq km of the Barents Sea in dispute. Negotiations to
resolve this issue have been in abeyance since 1981. The current Soviet actions
tacitly reject Norway's suggestion to forgo any activity that would prejudice
future negotiations on the disputed area, although Norway believes that the
Soviets are showing some restraint in returning to an area explored in 1982
rather than drilling farther into the disputed area
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Zimbabwean The government has announced it will create a national oil company to handle
Government fuel imports now handled by a private consortium. A major objective of the
To Control Fuel new parastatal is to build a 90-day fuel reserve, something the private
Procurement companies have found uneconomical. Zimbabwe faced a severe fuel crisis
earlier this year when it was caught without contingency reserves following the
sabotage at the Mozambican end of the Beira-Mutare pipeline in December
1982. Although the private oil companies had encouraged Harare to take over
the import function, the plan to increase reserves means that the government
will have to acquire storage facilities from the firms. Details are yet to be
worked out, but it is unlikely the government will nationalize the private
depots without fair compensation to the oil companies. Harare's long-term
plan is to take over distribution and retailing operations as well
International Trade, Technology, and Finance
Debtor Country Trade Trade balances for many key debtor countries improved markedly in 1982
Balances Improve primarily because of substantial reduction in imports in the second half of the
year. For 12 key debtors, imports fell 19 percent; Mexico, Argentina, Chile,
and Nigeria reported a drop of 35 percent or more. Brazilian and Philippine
Key Debtor Countries: Trade Balances a Million US $
Argentina
-1,360
710
2,620 b
Brazil
-2,830
1,200
780
Chile
330
-1,440
830
-340
-60
110
580
480
510b
-2,980
-3,550
7,720
12,230
2,760
5,870 b
1,680
200
40
-1,939
-2,667
-2,805 b
South Korea
-3,160
-2,950
-780
Venezuela
9,070
8,770
2,920 b
Yugoslavia c
-5,660
-5,280
-3,780
a Trade balances were derived using seasonally adjusted customs-
basis exports and imports. Exports and imports are valued f.o.b. For
some countries, trade balances computed on a customs basis do not
agree with those computed on a balance-of-payments basis.
b Estimated.
Trade balances are based on hard currency exports and imports.
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imports also fell in 1982, but larger declines in exports led to a worsening in
their trade accounts. Venezuela's trade surplus narrowed last year largely
because of a sharp fall in oil export revenues. The trade balances of a number
of key debtor countries should improve further this year. Countries under IMF
programs will be cutting back imports in an effort to meet their foreign
exchange targets-Mexican imports in the first quarter were down more than
two-thirds from their 1982 first quarter level. Sizable currency devaluations
since midyear 1982 in countries such as Argentina, Brazil, Chile, and Mexico
may also contribute to an improvement in trade balances. 25X1
West German West German Government and industry officials are increasing their criticism
Opposition to of revisions to the Export Control Act that are currently under consideration
Trade Restrictions by the US Congress. Economics Minister Lambsdorff, in an interview in a
West German financial periodical, said West Germany considers the Act
unacceptable. Bonn particularly opposes the extraterritorial provisions, which
would penalize US companies' European subsidiaries that do not comply with
US controls on East-West trade. Lambsdorff said his country wants to avoid a
repetition of the dispute last year over pipeline sanctions and will make its po-
sition clear to US officials at all levels, including those at the Williamsburg
summit. 25X1
Bonn is under pressure from West German industry, especially the machine
tool sector, to resist US provisions that would restrict its trade with the East.
The Eastern market accounts for up to 50 percent of sales for some firms, and
industry officials are especially concerned about provisions that would
require-on a case-by-case basis-proof that the exports do not improve Soviet
military or strategic capabilities. They would prefer that the burden of proof
rest with those seeking to restrict technology transfer. West Germany's
concern about the Act is shared by other European countries and could
seriously hamper efforts to reach an accommodation on East-West trade issues
in OECD, COCOM, and NATO studies now under way.
Polish Debt The Paris Club-the group of major Western governments responsible for
Rescheduling rescheduling Poland's officially backed debt-has agreed to delay a decision
on new negotiations until Warsaw provides previously requested information
on its adherence to the rescheduling agreement of 1981 and explains its
unequal treatment of creditors. The governments have asked Warsaw to
respond by the end of next month. The Paris Club is to meet in late July to de-
cide whether to proceed with a rescheduling of obligations for 1982 and 1983.
Many governments believe that the stalemate on renewing negotiations
benefits only Warsaw and Western banks because Poland has made no
payments on officially backed debts since December 1981. It has paid $2.2
billion to commercial banks under their rescheduling agreements.
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The creditors probably will become disunited if the Paris Club does not resume
negotiations with Poland after the meeting in July. The handling of the Pope's
visit to Poland will be a critical factor in the Western governments' decision in
July. Neutral governments-particularly Sweden and Switzerland-are anx-
ious to reschedule, and a move by these countries would increase pressures
within some allied governments to break ranks as well. The governments have
not yet discussed rescheduling terms among themselves, and any proposal that
does not include new loans probably will be rejected by Warsaw. Even if
agreement is reached on terms, Poland does not have enough liquid funds to
meet its obligations under the Paris Club agreement of 1981 and still make
payments due under the commercial bank reschedulings of 1981 and 1982.
Possible Soviet- The US Embassy in Mexico City reports that earlier this month a Soviet
Mexican Technical delegation led by a deputy minister of petroleum toured the facilities of the
Cooperation Mexican state oil company, Pemex, and signed a memorandum calling for
technical cooperation. The memorandum proposes scientific and technical
exchanges in oil-related areas such as drilling, production, and transportation.
Details of future cooperative projects reportedly are.to be worked out by
specialists. One Mexican official played down the memorandum by telling a
US diplomat that it is only an offshoot of the Soviet-Mexican scientific and
technical cooperation agreement of 1975.
The USSR may hope to use any new cooperative arrangements to acquire
advanced US oil-related technology from Mexico, which is not a member of
COCOM and which imports substantial oil equipment and technology from
the United States. Mexico's efforts to avoid violating US export controls,
however, could limit Soviet opportunities to obtain such technology. Moscow
may also hope to make additional sales of oil-related equipment to Pemex,
which has purchased some Soviet-manufactured drilling equipment in the past.
25X1
Portugal Secures The completion of a $300 million Eurodollar credit for Portugal late last week
$300 Million will do little to improve Lisbon's image in international financial markets or to 25X1
Eurodollar Loan ease its acute shortage of foreign exchange.
FThe initial disburse-
ment of the loan will amount to only $50 million, the equivalent of two days of
imports, and the next installment of $25 million is not due until December.
Hard currency reserves amount to only slightly more than two weeks of
imports, despite a $400 million gold swap with the Bank for International
Settlements last month. Since Portuguese officials are not likely to be able to
arrange additional financing until IMF assistance is lined up, they may be
obliged to carry out further gold swaps or, as a last resort, to sell part of
Portugal's nearly $9 billion in gold reserves during the interim.
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Canada Averts Trade Canada has dropped plans to trim imports of Chinese textile products after
Dispute With China Beijing threatened to stop buying Canadian grain and forest products. The
Canadians proposed the reduction in February in order to protect domestic
textile and apparel producers from low-priced Chinese goods. Ottawa appar-
ently is convinced that the threat is sincere, based on China's withdrawal from
US grain markets since the impasse on textile talks. Although we believe
China is avoiding US markets primarily because of high prices, Canada does
not wish to chance losing an important customer-which purchased about
$700 million in grain, wood, and paper products last year-over a few million
dollars worth of textiles and apparel
National Developments
EC Farm Price
Increases
Developed Countries
EC agricultural ministers last week agreed to raise farm prices for the
1983/84 marketing year by the smallest amount in 10 years-4.2 percent in
terms of European Currency Units (ECUs). Last year's increases averaged
10.4 percent in ECUs-12.2 percent in national currencies. Negotiations over
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member countries.
agricultural prices became deadlocked over two months ago because Italy
demanded $230 million in interest rate subsidies for its farmers to offset the
relatively low price increases. Moreover, EC farmers and the European
Parliament had demanded a 7-percent price hike. EC members kept increases
low because EC finances will be severely strained next year; Italy was given a
grant of $55 million and limited special measures were approved for other
European Community: Farm Price Increases, Percent
Marketing Year 1983/84
EC-10
4.2
6.9
Belgium
4.4
7.7
Denmark
4.0
4.7
Greece
5.6
25.8
Ireland
4.2
9.0
Italy
4.5
8.8
Luxembourg
3.9
7.2
The Netherlands
4.0
2.6
United Kingdom
4.1
4.1
West Germany
4.1
2.0
trade problems.
Price increases in national currencies for individual EC countries will vary
widely because the ministers also agreed to adjust the EC's green currency
system-the fixed exchange rates used to convert farm prices in ECUs to
national currency units. For example, farm prices for West German farmers
will rise only 2 percent in marks while those for Greek farmers will go up 26
percent in Drachmas. Commission officials almost certainly will point to this
year's small increases as proof of the EC's determination to cut agricultural
spending at the 3 June session of the ongoing US-EC talks on agricultural
Australian Interim The Hawke government's interim budget reflects the Prime Minister's concern
Budget over the projected $7.5 billion budget deficit for 1983/84. The costs of a $500
million jobs program will be more than offset by nearly $900 million in tax
hikes and spending cuts in other programs. Because of the budget's overall
deflationary effect, the country's record 10.3-percent unemployment rate
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probably will continue to increase. The jobs program is also an attempt by the
government to undercut growing union criticism of the wage freeze, which
Hawke wants to extend beyond the 30 June expiration date. In any case, the
interim budget foreshadows major changes in the full 1983/84 budget, which
will be presented in August and is likely to include further spending cuts and
tax increases. 25X1
Less Developed Countries
Venezuela's Exchange Industrialists are now publicly calling on Caracas to modify the multiple
System Causing exchange system, introduced in March, to prevent spreading economic disrup-
Problems tions. Through 28 April the government authorized dollar transactions at the
preferential rates totaling only $180 million-mostly for food imports. The US
Embassy estimates that Venezuela's essential imports-including capital
equipment and raw materials-are valued at $800 million per month.
the private sector has been unable to obtain
dollars at the preferential exchange rate, thereby causing difficulty in
importing goods and servicing debt since the end of February)
Despite business complaints, Caracas has been deliberately slow to clarify the
new foreign exchange regulations in an effort to stem the loss of liquid foreign
reserves, which now stand at about $3.5 billion. Thus far, the tactic has
enabled the Central Bank to build up reserves by some $400 million during
March and April. At the same time, however, the current exchange system is
laying the foundation for more serious economic problems:
? The US Embassy reports some spot shortages of consumer items, and
industrial inputs have caused factory shutdowns and new layoffs.
? Businessmen face a severe profit squeeze because they are unable to offset
increased foreign exchange costs in the face of the government's extension of
controls on prices.
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We expect Caracas will try to increase the availability of dollars to prevent
shortages of basic goods and production slowdowns.
Brazil Grain (Brazil is drawing up a plan to increase grain and
Production Plan oilseed production by at least 10 million tons within the next two years. To
meet this goal, Brasilia plans to increase acreage in the new farmlands of
central Brazil. Brazil decided to raise grain and oilseed production because of
the need to increase export revenues and to fill a perceived opening in the
international grain market as a result of acreage reduction programs in the
United States. Given the proper external financial support, a doubling of
Brazil's grain and oilseed exports by 1985 is possible. Combined with
significant Brazilian exports of corn for the first time since the mid-1970s,
increased exports will aggravate the mounting glut in the world grain market.
Tanzania Backtracks Dar es Salaam's recent efforts to stem Tanzania's economic decline have
on Economic Initiatives already begun to dissipate. Although the atmosphere of meetings held in April
between Tanzanian officials and IMF representatives reportedly was better
than in late 1982, the two sides remain far apart on key issues-including
devaluation and controls on consumer prices. President Nyerere has whittled
away most private incentives initially included in Tanzania's much vaunted
new agricultural policy. The government's zealous anticorruption campaign
has backfired because many shopkeepers have closed their doors rather than
risk prosecution for what until recently were normal business practices,
the crackdown is adding to disgrun-
tlement within the military by punishing soldiers who had been profiting from
unlicensed businesses and the resale of subsidized government food supplies.
Threatened with a cutback in foreign aid, Nyerere has begun to take
unpopular stopgap measures to keep the country solvent. Unable to find cash
to meet expenses, he has ordered businessmen to sell essential commodities to
the government on credit, which rarely is repaid promptly, if at all.
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Jamaican Economic The IMF and Jamaica have reached a preliminary agreement on financial aid
Troubles Grow for a third year, but the terms of the program will severely limit the country's
economy in the short term. A $150 million loan promised by Kuwaiti lenders is
an important part of the aid package. Jamaica has reluctantly agreed that, if
the loan falls through, it will automatically implement difficult austerity 25X1
measures. The agreed actions would include shifting an additional $150
million in imports from the subsidized official rate to a more costly commer-
cial level. The agreement also requires Jamaica to make major reductions in
government spending, in the money supply, and in the growth of credit.
The US Embassies in Jamaica and Kuwait are skeptical that the Kuwaiti loan
will materialize and believe that the contingency provisions are likely to come
into effect soon after final IMF approval, perhaps late next month. Jamaica
probably will be unable to avoid a contraction of its economy this year or to
keep unemployment from rising above the current level of 28 percent.
Increased foreign purchases in the costlier commercial foreign exchange
market will help to push inflation above the 15-percent rate that is already an-
ticipated. The failure of the economy to improve next year would damage
Prime Minister Seaga's chances in the next election, which has to be held by
China Expanding China plans to increase trade substantially with Eastern Europe as well as the
Communist Trade Ties USSR this year. Since signing the March protocol to increase trade with
Moscow to $800 million this year-the highest level since the early 1960s-
Beijing has also concluded trade agreements with a number of East European
countries specifying significant jumps over last year's levels: Hungary in-
creases 80 percent; Czechoslovakia, 50 percent; Poland, 48 percent; East
Germany, 25 percent; and Bulgaria, 15 to 20 percent. China even signed a
$100 million trade agreement with Albania when trade representatives visited
Tirana in March-the first such meeting since 1978. 25X1
In addition, Beijing signed agreements that will boost trade with Romania 25
percent to $1.1 billion and with Yugoslavia to $180-200 million-triple the
value reached last year. Recognizing the difficulty these trade partners have in
filling their energy needs, China agreed to increase exports to Romania on a
barter basis and arranged a three-way swap to supply Yugoslavia with
Nigerian oil.
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With these increases, the USSR and Eastern Europe may account for about 8
percent of China's trade in 1983. Beijing's decision last year to save foreign ex-
change by renovating existing Soviet-built plants instead of importing new
high-technology plants from the West has made trade with Eastern Europe
more attractive. Some Chinese leaders apparently also see Eastern Europe as a
market for goods China cannot sell to the United States. Moreover, China may
see trade as a means of rebuilding political ties with some Warsaw Pact states
at Moscow's ultimate expense. Beijing's recent diplomatic and economic
initiatives are clearly intended to help Romania and Yugoslavia maintain their
independence from Moscow.
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Lebanon: Economic Consequences of a
Negotiated Settlement
The vitality of Lebanon's predominately trade- and
service-based economy depends heavily upon
Beirut's relations with its Arab neighbors. A large
portion of Lebanon's exports go to Arab states that
are also the source of substantial flows of remit-
tances and other services earnings. Arab reaction to
the Lebanese-Israeli accord on foreign troop with-
drawals could have a significant impact on these
vital links.
A Syrian-led embargo without the compliance of
moderate Arab states, which so far have supported
Beirut's signing of the agreement, could easily be
circumvented. If the agreement evolves into full
normalization of relations with Israel, however, it
will most likely provoke a much broader Arab
backlash. Even this could be weathered if Israel
and Western countries opened their borders to
Lebanese goods, and Arab sanctions-as in the
case of Egypt-do not apply to transfers of worker
remittances and other private funds.
Lebanon's Economic Relations With Its Arab
Neighbors
The advantages of Lebanese-Arab economic ties
flow in both directions, but the bulk of the financial
benefits has historically accrued to Beirut. In the
early 1970s, trade and services provided as much as
55 percent of the country's GNP and employed
nearly 50 percent of the labor force.' Growth in this
sector was the major impetus behind Lebanon's
respectable 7.5-percent average annual real GNP
growth performance in the 1970-74 period. More-
over, roughly 50 percent of Lebanon's foreign
exchange receipts originate in the Arab world. E
Statistics used in this paper are derived from random and ad hoc
sources because Lebaron has not published a consistent data series
Neighboring Arab states became a lucrative export
market for Lebanese agricultural and light indus-
trial goods following the 1973-74 oil boom. Low
transportation charges heightened the attractive-
ness to Arab importers. Overall exports increased
sevenfold to $1.5 billion from 1970 to 1974, with a
similar increase recorded in exports to Arab states;
in particular, exports to Saudi Arabia increased
nearly 13 times in that period. By 1981, about 60
percent of Lebanon's exports and over 95 percent of
its industrial exports were being marketed in just
six Arab states-Saudi Arabia, Iraq, Syria, Ku-
wait, Jordan, and Egypt.0 25X1
Lebanon's imports from its Arab neighbors totaled
only $560 million in 1981, about 14 percent of the
total. Of this, oil-mainly from Iraq in 1982-
accounts for over 90 percent. The Trans-Arabian
pipeline (Tapline) from Saudi Arabia and the Iraqi-
Syria-Lebanon pipeline were meant to feed refiner-
ies at Sidon and Tripoli, respectively. Fighting in
Lebanon and political disputes between one or the
other of the countries involved have interrupted
pipeline deliveries. Currently, oil is being brought
in by tanker because of war damage to Tapline and
Syria's decision to cut off Iraq's major export route
as a show of support for Iran. FI 25X1
Remittances from Lebanese workers in the Gulf
have increased significantly since the oil boom.
Gross remittances of $230 million offset 55 percent
of Lebanon's trade deficit in 1970. In 1982, remit-
tances reached $3 billion; open sources reported
that about 250,000 Lebanese working in the Gulf
Secret 25X1
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Cypru
Mediterranean Tripel
Sea Lebar
BEIRUT
Sidon'
lsraelI
1Ba iyas
Syria
1/Jordan
l jA`r~/istice
Ling I
Ku; alt
l,
Saudi Arabia
Ethiopia
People's Democratic
Republic of Yemen
(S. Yemen)
Secret
27 May 1983
Arabian Sea
Pipeline O Oilfield
Oil terminal
Road Railroad
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Secret
Exports
192.1
1,463.0
1,200.0
1,252.0
850.0
Saudi Arabia
28.7
396.1
340.5
344.9
Iraq
11.3
41.9
113.0
164.0
Syria
13.3
87.5
80.6
83.8
Kuwait
22.8
50.8
68.9
68.9
Jordan
11.3
23.4
44.4
50.4
Egypt
3.8
73.8
23.3
36.6
Other, mainly OECD
100.9
789.5
529.3
503.4
Imports
604.8
2,455.0
4,162.6
3,945.6
2,700.0
Saudi Arabia
6.6
55.6
392.0
450.0
Iraq
27.7
52.3
137.7
55.1
Egypt
3.3
13.8
19.8
25.0
Syria
23.0
57.8
13.9
25.0
Jordan
5.6
13.7
7.7
7.7
a Lebanese post-1975 trade data are derived from the Direction of
Trade Statistics and from spot reports from the US Embassy in
Beirut.
b Estimated from third-quarter trade returns.
states alone sent home about $1.5 billion, over 80
percent of the estimated trade deficit. (These funds
included remittances of Palestinians in the Gulf,
who were sending funds to families in refugee
camps in Lebanon.) The availability of jobs outside
the country has also provided an important source
of employment for workers displaced by strife-
induced disruptions to the Lebanese economy. F_
Arab aid, which has never met commitments nor
expectations, has had a much smaller impact on the
Lebanese economy. At the 1979 Arab summit in
Tunis, seven of the richer Arab states-Saudi
Arabia, Kuwait, Libya, Iraq, the UAE, Algeria,
and Qatar-pledged $2 billion over a five-year
period for reconstruction and development projects
in Lebanon. As of March 1983, according to the
US Embassy, Beirut had received only a little over
$400 million, about one-third the amount due since
the summit. Some of the backsliding has been laid
to financial difficulties in the donor countries-
Algeria and Iraq are cases in point-but most of
the shortfalls have stemmed from donor country
reaction to security and political developments in
Lebanon.
Lebanon's role as a regional trade and financial
center has diminished sharply since the mid-1970s.
Beirut, once a leading financial center for the Arab
world, has seen its role eclipsed by the development
of banking facilities in Bahrain and other Gulf
Arab states. Moreover, many Arab governments
now prefer to make their own transactions directly
through New York or Western Europe. Beirut's
role in facilitating regional trade has also fallen off,
in large part because of continuing domestic strife.
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A good portion of Arab trade traditionally passed
through Lebanon, and although the country contin-
ues to expedite some trade to Arab States via road
and rail links from Syria and Jordan, the volume
has declined since the Lebanese civil war in 1975.
In 1980, Beirut reported reexports of $320 million,
95 percent of which went to Arab states, according
to the Beirut Chamber of Commerce. Today, Leba-
non's major economic role in the region probably
lies in the expertise and skill of its expatriate
Moreover, goods that normally transit Syria could
be shifted to other routes, even though transport
costs would rise somewhat.
More comprehensive measures, however, could pre-
sent Beirut with some serious problems. A boycott,
joined by moderate Arab states would affect 60
percent of export earnings and over $300 million in
transit trade. Because of its close aid ties with
Saudi Arabia and the other Gulf oil producers,
even Jordan might be persuaded to join an embar-
workers in neighboring Arab states.
Prospects for Sanctions
Now that Lebanon and Israel have come to an
agreement on security arrangements, negotiations
will turn to the issue of "normalization" of rela-
tions, including Lebanese repudiation of the Arab
boycott. The Israeli view, according to press re-
ports, is that "there is no security without peace, no
peace without normalization, and no normalization
without at least a limited amount of trade." Radi-
cal Arab governments, led by Syria, are likely to
call for punitive measures if the Gemayel govern-
ment makes this kind of peace with Israel. Even
moderate Arab states like Saudi Arabia, Kuwait,
and Jordan, concerned with the status of Jerusalem
and the West Bank, would oppose formal Lebanese
ties with Israel and would probably join with the
radicals to impose at least a token boycott against
Lebanon.
The effects of these measures would, of course,
depend on the kind of boycott undertaken and the
extent to which it was adhered to by area Arab
countries. A selective boycott against Lebanese
firms that do business with Israel would probably
have a very limited impact; few Lebanese compa-
nies would be likely to risk their valuable Arab
trade ties to do business with Israel. A similar move
against Egypt after Camp David had little effect on
Cairo's day-to-day economic activities. A trade and
transport embargo implemented only by Syria and
other radicals-South Yemen and Libya-would
also do minimal damage. Syria took only about
7 percent of Lebanese exports in 1980 and 1981.
Secret
27 May 1983
Saudi and Jordanian disquiet over the flow of
Israeli products into Lebanon since the invasion has
already led to a limited boycott against Lebanese
goods. From mid-March to mid-April Riyadh
banned some foodstuffs, clothing, textiles, and elec-
trical equipment, whether made in Lebanon or
imported. The US Embassy in Riyadh believes, and
we concur, that a more extensive Saudi ban could
be imposed if an agreement with the Israelis leads
to open borders and a free flow of goods. Addition-
ally, Amman announced in early March that im-
port licenses would not be granted to non-Lebanese
goods coming from Lebanon without proper docu-
mentation.
A full or partial trade embargo would be the most
visible way for the Arabs to demonstrate their
displeasure, and the least disruptive to their
economies:
? Imports that normally transit Lebanon could be
easily shifted to other transit points such as
Jordan, Turkey, or other points in Western
Europe.
? Lebanese agricultural exports could be replaced
by purchases from southern Europe.
? A show of solidarity with other Arab states would
not impose an inordinate burden on Baghdad-
which has taken about 30 percent of Lebanon's
industrial exports since 1979-because this trade
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has already fallen off with the Syrian-Iraqi bor-
der closure and Iraq's growing financial prob-
lems.
Prospective future aid to rebuild Lebanon would
almost certainly fall victim to an Arab boycott.
Lebanon's potential benefactors maintain that the
security situation has hampered aid donations,
implying that more may be forthcoming once the
situation improves. An agreement, however, that
ignores Arab opposition to normalization of rela-
tions with Israel before a comprehensive peace
settlement will virtually assure continued tightfist-
edness on the part of Saudi Arabia and other Gulf
states
Most of Lebanon's other ties to its neighbors are
not as vulnerable as trade. The Gulf states are
unlikely to expel their Lebanese workers, reasoning
that the quarrel is with the government in Beirut
and that workers should not be penalized. In
addition, many are in skilled positions that could
not be easily filled by locals. Moreover, existing
direct business arrangements are not likely to be
disrupted, since most benefit members of the ruling
families in the parent countries.
Longer Term Options
The Lebanese would have few options in the event
of an Arab boycott. Development of alternative
markets for its agricultural and light industrial
exports would be especially hard. Lebanon's other
natural export markets are Israel, Egypt, and
Southern and Western Europe. In the case of
Israel, despite the Begin government's encourage-
ment of a limited level of exports to Lebanon since
the invasion, trade has only been permitted to flow
one way. Much of Lebanon's agricultural produce
directly competes with Israeli goods. Tel Aviv,
however, might be persuaded to lower barriers to
Lebanon's exports in exchange for normalization.
In the absence of trade barriers, Lebanese industri-
al products could probably compete on the Israeli
market.
Egyptian officials would probably want to be as
helpful as possible in the event of an embargo
against Lebanon. The Egyptians realistically be-
lieve that Beirut will have to take some steps to
normalize relations with Israel to achieve a troop
withdrawal. Economically, Egypt could probably
absorb more of Lebanon's exports and would be a
possible source of oil if Iraq decided to turn off the
spigot. High West European trade barriers against
agricultural products and semifinished textiles 25X1
would preclude large-scale imports of Lebanese
goods without special provisions.
As far as aid is concerned, the active involvement
of the United States in the negotiations will no 25X1
doubt make Washington, at least in President
Gemayel's estimation, the potential donor of first
resort should the political and security conditions in
Lebanon stabilize to the point where reconstruction
can begin. The dynamic Lebanese private sector, .
however, could garner most of the funds necessary
to rebuild the country on their own, either domesti-
cally or through international financial institutions.
While Arab funds and backing would certainly
make the task much easier, lack of it will by no
means preclude a substantial reconstruction effort.
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Secret
Jordan: Coping With Slower
Economic Growth'
The rapid growth in Jordan's key sources of foreign
exchange is grinding to a virtual halt, reinforcing
King Hussein's reluctance to take foreign policy
measures-such as negotiating with Israel-not
supported by Saudi Arabia and his other Arab
financial backers. Amman's most immediate finan-
cial concern is rapidly rising military debt pay-
ments. As of 14 May Amman was $204 million in
arrears on payments to the United States, and total
payments due this year
Worsening Balance of Payments
The key external forces that have pulled Jordan's
economy rapidly ahead over the past decade slowed
dramatically in 1982:
? The decline in oil prices and concomitant eco-
nomic slowdown in the Gulf virtually halted
growth in worker remittances.
? Iraq's financial problems severely cut into its
demand for Jordanian exports.
? Arab donors slowed their aid payments.
? Prices for phosphate-a major export-remained
soft.
These trends combined to produce an estimated
record $1.5 billion civilian current account deficit;
military imports were an additional several hun-
dred million dollars. Meanwhile, real GNP growth
dropped to less than one-half the 16 percent
achieved in 1980.
Although Jordan's foreign exchange position im-
proved somewhat in the early months of 1983-the
' Statistics used in this paper are derived from random and ad hoc
sources because Lebanon has not published a consistent data series
since 1975.0
Jordan: Expenditure on GNP, 1981 Million US $
Consumption 4,245
Private 3,366
Government 879
Gross fixed capital formation 1,736
71
Exports 1,935 25X1
Imports 4,279
Gross domestic product 3,708
receipt of a $225 million Euroloan negotiated in late
1982 raised reserves to $940 million or three months
of civilian merchandise imports at the end of
March-we expect the balance of payments to deteri-
orate during the rest of 1983. Foreign exchange 25X1
receipts are likely to drop, and payments for past
purchases of weapons will rise substantially
Of the $1.25 billion in Arab aid due Jordan under
the 1978 Baghdad agreement, we expect that 25X1
Jordan will receive just $780 million this year.
Libya and Algeria have usually reneged on their
commitments
The Saudis and the smaller Gulf states will proba-
bly continue to fulfill their Baghdad commitments;
they view the Baghdad subsidies as one of the few
remaining expressions of Arab solidarity against 25X1
Israel. The United Arab Emirates and Qatar,
however, probably will delay writing their checks as
long as possible, as they did in 1982, leaving only
Saudi Arabia and Kuwait likely to pay on a timely
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979
4,687
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Jordan: Prospects for
Baghdad Aid, 1983
Million US $
Donor
Annual
Commitment
Status
Saudi Arabia
357.1
Likely to pay
Kuwait
196.4
Likely to pay
Libya
196.4
Defaulted
Iraq
185.7
Defaulted
United Arab Emirates
142.9
Slow payer
Algeria
89.3
Defaulted
Qatar
82.1
Slow payer
balance-of-payments problems. The outlook for fer-
tilizer-another key Jordanian export-is also dim.
Rising Military Debt
Total commitments: 1,250
Maximum 1983 receipts: 780
Although Jordan's five-year development plan is
counting on net worker remittances to grow
10 percent annually, we expect that they will grow
much more slowly, if at all, over the next three
years. The soft oil market and the resulting finan-
cial pinch throughout the oil-rich Arab states have
prompted postponements of new projects and ef-
forts to cut back foreign work forces. In a recent
conversation with a US Government official,
Jordan's Under Secretary of Labor projected that
the number of new workers going to the Gulf this
year will total just 4,000 compared with 12,000 in
1979. One senior official in Amman has told the
US Embassy that remittances actually declined in
the early months of 1983. Kuwait has already
frozen the number of non-Kuwaitis on the public
payroll and is attempting to cut the government's
foreign labor force by 10 percent.
Phosphate exports account for one-third of Jordani-
an merchandise exports, and we expect phosphate
prices, which declined about 8 percent in 1982, to
fall again this year. The US Embassy reports that
Jordan is already selling its phosphate at less than
the cost of production. Even if world demand picks
up, the market is likely to remain soft as Morocco,
the world's major exporter of phosphates, will
probably boost production to ease its own
Secret
27 May 1983
foreign debt payments for purchases of military
well above expected Baghdad re- 20A]
ceipts.
ceipts. If Jordan makes these payments on time, we
estimate that total military expenditures will ab-
sorb just over one-fourth of GNP in 1983, up from
roughly 12 percent in 1982. By comparison, we
believe that, in years past, the military had been
able to live within its usual allocation of about 40 25X1
percent-$250-450 million-of Baghdad aid re-
Although a detailed breakdown is difficult as Am-
man publishes no information on its military debt
or military imports, we believe that the bulk of the
debt is due to France, the United Kingdom, and the 25X1
United States.
The Jordan Armed Forces (JAF) is traditionally
responsible for meeting payments on military debt
As of 14
May, the JAF had already fallen $204 million into
arrears on its payments to the United States for
cash purchases and past loans under the Foreign
Military Sales (FMS) program.
25X1
25X1
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Secret
32 58
42 70
Net worker remittances 18 45
Tourism 4 2
Other 20 23
Private transfers 7 11
Current account balance -71 -190
Capital account balance 134 196
Official transfers 144 187
Other -10 9
14 7
77 13
a Estimated.
b Projected.
c Projection based on the 1981-85 development plan.
d Not specified.
Finding the Money
Drawing on reserves,
however, to meet a substantial share of the JAF's
debt payments would leave the government only a
thin cushion to cope with any other sudden foreign
exchange shocks such as the default of another
major donor or a steep decline in phosphate prices.
Little official consideration has apparently been
given to drastically cutting back the budgets of
other government departments to accommodate the
military's needs. Moreover, we believe Amman will
be reluctant to resort to import restrictions, devalu-
ation, or sharply higher customs duties to conserve
207 744 824 860 1,828
508 1,103 1,047 1,100 1,480
390 888 920 920 1,057
111 182 97 150 d
7 33 30 30 423
11 47 30 50 d
-294 -1,314 -1,479 -1,490 -1,243
271 1,431 1,389 1,270 1,243
370 1,273 994 950 838
-99 58 395 320 405
5 -175 -111 140 0
-18 -58 -201 -80 0
foreign exchange. Such steps would cut heavily into
customs revenues, the government's main source of
domestic income. In addition, the Central Bank 25X1
believes that the debt problem is temporary; Cen-
tral Bank Governor Nabulsi has stated that the
current high level of military payments is a tempo-
rary bulge and that by mid-1984 payments will
drop substantially. Jordan is not known to be in 25X1
arrears on any of its nonmilitary external public
debt of roughly $1.7 billion.) 25X1
Financing the debt service through a second Euro-
market loan is a more likely possibility. In late
1982 Jordan was able to borrow $225 million on
the Euromarket at surprisingly favorable terms-
just one-half percentage point above LIBOR. Simi-
lar terms, however, would not be available for a
second loan. In early April 1982
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Investment As A Share Real GNP Growth Growth of Industrial Inflation Foreign Exchange
of GDP Percent Production Percent Reserves
Percent Percent Million US $
10 111111 11111111 5
market would have few qualms about lending
Jordan another $300-400 million, the spread would
have to be at least 0.875 percent, one point above
LIBOR. Since then, the spread has probably risen
even higher, due to the growing political and
military tension in the area.
The remaining option for the government is to
obtain more foreign aid. Although Amman has
tried hard to persuade the Saudis to foot the bill, so
far the King has only been able to get $50 million
over and above the Saudis' Baghdad payments,
with the promise of about another $200 million to
come. While Riyadh has made a $119 million
installment on its 1983 Baghdad commitment, the
other three Arab states still honoring their Bagh-
dad obligations have not yet done so. (The Kuwaitis
traditionally make their first payment in June.)
Until they do, additional Saudi aid is not likely to
significantly ease the government's financial situa-
tion.
Domestic Consequences
Amman's inability to sustain past economic growth
levels has prompted increased criticism of the King
and demands for more popular participation in
government decisions. The US Embassy reports
that Jordan's business community, which views
Prime Minister Badran and his Cabinet as strongly
antibusiness, is increasingly critical of the govern-
ment's price controls and other economic policies.
Some businessmen are also beginning to question
the wisdom of the King's continued close alliance
with Iraq, according to the US Embassy. Hussein
has actively encouraged Jordanian companies to do
business with Iraq, and, as Iraq's foreign exchange
crisis has intensified, Baghdad has stopped pay-
ment on a number of contracts with Jordanian
merchants. The situation has become so worrisome
that the Central Bank has recently announced the
formation of a credit facility to bail out overextend-
25X1 25X1
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27 May 1983
ed Jordanian firms.
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Secret
Jordan: Comparison of Capital Accounts, 1981
alt should be noted that neither of these charts take account of
military indebtedness.
We believe that shrinking job opportunities in the
Gulf, continued rapid population growth, and the
domestic slowdown presage the return of domestic
unemployment, which virtually disappeared be-
tween 1975 and 1981. Large numbers of highly
skilled, well-educated young Jordanians who antici-
pated lucrative jobs in the Gulf states or in Amman
could be in for a rude awakening. The government
is attempting to remedy the structural mismatch
between the types of jobs available domestically
and the high skills of Jordanian workers by opening
vocational training centers. Many young people,
however, whose professional expectations are much
higher, are reluctant to enroll.
We do not believe that businessmen or other groups
hurt by the economic slowdown are currently ready
to assume the considerable risks of mounting a
determined challenge to the King. Although the
economic outlook for the next several years is
worsening, we agree with the US Embassy's assess-
ment that only if avenues to a better life are firmly
closed will socially and economically deprived
Jordanians risk the political stability they have
enjoyed since the civil war of 1970-71. Although
fundamentalist sentiment is increasing in the uni-
versities-most visibly in the number of veiled
women-we do not believe that violent, fundamen-
talist reaction to current problems is likely.
Hussein is, however, a cautious politician who
would prefer to avoid domestic grumbling. In an
attempt to stave off criticism, Hussein would prob-
ably allow an increase in the scope of public debate
over economic policy alternatives so long as his
monopoly on power is not questioned.
Implications for the United States
Although Jordan has occasionally fallen into ar-
rears on its US debt before, Amman is proud of its
reputation as a fiscally prudent state and is ex-
tremely sensitive to what it perceives as undue
outside concern. US military officials in Amman
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have reported that some working-level JAF officers
are suspicious that the recent rounds of discussions
with the United States over Jordan's arrearages
represent an attempt by Washington to pressure
Jordan on political issues, particularly on the
Reagan peace initiative.
Jordan's dimming economic prospects and current
foreign exchange worries mean that Hussein can-
not afford to antagonize his major financial backers
and will not make political moves that run a strong
risk of entailing a further decline in their financial
aid and political support to this regime. He will
want firm Gulf-Arab backing before joining any
peace negotiations with Israel. Hussein has always
regarded financial assistance as a sign of political
support, and, in the event that he may yet agree to
join the US peace initiative, he will expect a major
increase in US and other Western economic assist-
ance, possibly including a relaxation of require-
ments for military debt service
Secret 24
27 May 1983
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Secret
Public Services in Cairo:
Potential for Unrest
Decades of rapid population growth, inadequate
maintenance, and insufficient investment have pro-
duced a public services crisis of major proportions
in Cairo. The problems caused by unreliable or
inadequate water, electrical, waste disposal, and
transportation systems are constant sources of frus-
tration to Cairenes, impede commerce and invest-
ment, and could ultimately spark serious outbreaks
of domestic unrest. The remarkable forbearance
displayed by the public may not last. A groundswell
of public anger following a major sewer break in an
older section of Cairo in July 1982 led to the
deployment of security forces in the area and
demonstrated the serious potential for urban vio-
lence.
Importance of Cairo
Although the urban infrastructure is declining
throughout Egypt, a deterioration in the quality of
life is most evident in Cairo and Alexandria,
according to the USAID Mission in Cairo. The
decay in Cairo potentially has the most serious
political consequences because the city is the center
of national life. Nearly one-fourth of all Egyptians
live in the greater Cairo area, and these residents
tend to be better educated and to have higher
expectations than rural Egyptians. President
Mubarak's efforts over the past several months to
begin the overhaul of Cairo's infrastructure and his
requests for US help reflect the city's importance.
Egyptian officials fear that frustrations over living
conditions in Cairo could lead to unrest that might
threaten the regime's survival. Disturbances else-
where in Egypt are far less menacing.
The government faces an immense challenge, and
we believe it will be extremely difficult to maintain,
let alone improve, the quality of life in Cairo.
Unless the city's population growth rate of 4 to
4.5 percent a year is slowed, the population of the
greater Cairo urban area will double by the year
2000 from 10 million. Government efforts to stem
growth, including attempts to create other urban
centers, so far have failed to relieve the population
pressure. 0 25X1
The provision of piped water varies widely within
Cairo. About two-thirds of all buildings in the
greater Cairo area are directly connected to the
public water system. In some areas, however, par-
ticularly where housing has been built without
government permits, buildings are not eligible for
water connections and other public utilities. Resi-
dents in these areas depend on canals or public
standpipes, where disputes often arise over water
sharing. Water prices are estimated at 10 to
20 percent of operating costs and provide little
incentive for conservation. Such low rates also
produce insufficient revenue for upkeep-a partic-
ular necessity since sections of the water system
date back to the beginning of this century. As a
result, low pressure and service interruptions are
Sanitary drainage poses as big a problem as water
supply. Despite expansion efforts in recent years,
parts of the greater Cairo area have no access to
the public sewerage system, a situation that creates
major health problems. Where the system is in
operation, there are frequent leaks due to insuffi-
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cient capacity and maintenance. A recent study by
the Cairo governorate stated bluntly that the sew-
erage system simply is unable to absorb the volume
of Cairo waste water. According to a government
sanitary official quoted in al Ahram, there are
periodic leaks at more than 200 locations.
Cairo lacks a municipal solid waste management
system, and trash in the streets has been cited as
the most significant source of frustration to
Cairenes. In some central city areas, uncollected
refuse at times reaches half a meter deep or more.
Indeed, some streets are completely blocked by a
combination of garbage and construction materials.
There is no public responsibility for the collection
of household and business waste. This is left to the
free market, primarily to a community of garbage
collectors, the zabbaleen. The zabbaleen's donkey
carts collect more than half of Cairo's trash, ac-
cording to a recent World Bank study. They pro-
vide service primarily in middle and upper class
neighborhoods.
Electricity is the most extensively provided public
service and is less a source of complaint. In the
1976 census, 77 percent of buildings were connect-
ed, and, according to a more recent survey by a US
firm and the Egyptian Government, service has
been steadily expanded since then. Not all are legal
hookups, however, and many buildings simply tap
into a neighbor's electrical source and help pay the
bill. This contributes to breakdowns and occasional
outages. Although household consumption is only
10 percent of national consumption, it has grown
rapidly in recent years. Low electricity prices,
rising incomes, and greater imports of consumer
electronics allowed under Sadat's "open door" eco-
nomic policy have helped fuel this growth.
Street congestion in Cairo is one of the most visible
of the city's problems. The parking problem in the
central business district is caused by some 17,000
cars parked in an area with only 5,000 parking
spaces, according to a recent World Bank study.
Double and triple parking or parking on sidewalks
disrupts the city's heavy vehicular and pedestrian
traffic.
Secret
27 May 1983
Public transportation is straining to meet demand.
A recent World Bank study indicates that 63 per-
cent of all trips in Cairo are made by public
transportation (buses and taxis), 23 percent by 25X1
walking, and 14 percent by private cars and motor-
cycles. One-third of Cairo's 2,300 buses usually are
out of service. Those operating are severely over-
loaded, leading to increased wear. Crowded streets
cause low operating speeds and reduce efficiency.
Cairo's current problems stem not only from popu-
lation growth but also from government ineffi-
ciency and inertia. Tangled lines of authority and
bureaucratic buckpassing are the norm in Egypt.
Responsibility for public services is divided among
several bureaucracies. The three governorates with
local jurisdiction-Cairo, Giza, and Kalyubia-
acknowledge little responsibility except for street 25X1
construction, cleaning, and maintenance. Public
services such as transportation, water, sewerage,
and electricity are provided by other government
agencies.
The tendency toward bureaucratic proliferation
was displayed in January when a new. environmen-
tal agency was created to deal with problems
affecting the quality of life. This new organization
is supposed to serve as a link between the Prime
Minister's office and the various ministries and
other agencies that deal with public services. It is
not yet clear whether the new organization will be
given the funds or the responsibility to take action.
At a minimum, however, it will provide another
layer of bureaucracy that impedes rather than
Government subsidies have contributed to public
service problems and constitute a major impedi- 25X1
ment to their resolution. Tariffs and fees bear little
resemblance to actual investment and operating
costs, which results in inadequate funds for mainte-
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Secret
nance and new investment. Sewerage services to
those connected are free, and water tariffs are only
10 to 20 percent of the cost of supply, according to
a recent World Bank study. Transportation fares
and electricity rates-despite some recent in-
creases-do not cover more than a fraction of
operating costs. The Cairo Transport Authority has
always run at a loss, and its management philoso-
phy has become engrained with the mentality of
subsidies, according to the same World Bank study.
The government has been very cautious about
pricing issues. An extensive and costly system of
price controls and subsidies has evolved over the
years to protect Egyptian consumers from inflation.
In the case of bread and other food subsidies,
government policies are expensive but have suc-
ceeded in feeding poor Egyptians and maintaining
stability. In the case of public services, however, the
benefits of low prices are undermined by the poor
quality of such services.
When price changes have occurred, they have been
small. In the spring of 1982, electricity prices paid
by household consumers and small businesses were
increased by 5 to 20 percent. In anticipation of
domestic complaints the hikes were made with little
fanfare, and the public mood was closely monitored
by security officials. The changes did not cause
security problems, and this may indicate that the
government has more latitude for raising utility
rates than it thinks.
A further constraint on improvements in Cairo's
public services has been the central government's
efforts to direct urban spread to new settlements in
the desert. While an attractive idea aimed at taking
the pressure off Cairo, its promise has not been
fulfilled. Progress on these new cities, such as
Sadat City and Tenth of Ramadan, has proceeded
slowly. In particular, they lack the jobs needed to
lure residents. Private business and the government
still prefer to invest in Cairo because, despite its
problems, there is a wider range of services, labor,
and sales outlets than in the new cities.
The Challenge Ahead
Cairo will remain the center of commerce in Egypt,
but unless the government can provide a sound
infrastructure, its efficiency as an urban center will
decline. The productivity of the work force will
continue to suffer because of the poor living envi-
ronment. Perhaps more dangerous, however, is the
prospect that the declining quality of life will 25X1
provide a fertile breeding ground for antiregime
opposition groups. Unless remedies are found, Is-
lamic fundamentalists and leftists will attempt to
cite deteriorating urban conditions as a major
argument for changes in Egypt's leadership.
Egypt's Five-Year Plan for 1982/83 to 1986/87,
which was approved by the People's Assembly in
January 1983, supports Mubarak's goal of improv-
ing public services. A breakdown of investment for
the plan indicates that 13 billion pounds ($18 25X1
billion at the official exchange rate) in investment
is earmarked for electricity, transportation, public
utilities, and other public services throughout the
country. A reflection of the government's changing
priorities is the virtual phasing out of public hous-
ing investment, leaving it to the private sector. 25X1
Although inadequate housing remains a problem,
the government has realized that it should concen-
trate its limited resources on public services that
are outside the scope of the private sector.
Achieving the goals of the five-year plan, however,
will prove difficult, particularly given the decline in
world oil prices. Petroleum provides one-fourth of
Egypt's foreign earnings, and hard currency short-
ages probably will reduce imports needed to sustain
economic growth. The five-year plan, moreover, 25X1
assumes real economic growth of 8 percent per year
throughout the period and a doubling of the domes-
tic savings rate over the course of the plan. This
fast growth and the increase in savings are expect-
ed to generate domestic resources for investment.
The assumed 8-percent real growth already is being
discounted by Egyptian officials, however, in dis-
cussions with US Embassy officials, and the in-
creased savings rate is unrealistic as well.
Secret
27 May 1983
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Shortfalls in the availability of resources for the
five-year plan will not necessarily reduce
Mubarak's desire to improve public service invest-
ments and maintenance in Cairo. Nonetheless, it
will take a major leadership effort to maintain
ambitious programs in Cairo while cutting back
elsewhere. Should the government reduce efforts in
Cairo, a further decline in services could well
occur. For example, the National Urban Policy
Study done in 1980 and 1981 for the Ministry of
Development by US and Egyptian experts project-
ed a needed investment of at least 12 billion pounds
($17 billion at the official exchange rate) in the
greater Cairo area alone during 1986-2000 to
provide the growing population with minimum
services and housing by the next century. Although
these figures are not directly comparable to the
five-year plan, they indicate the magnitude of
future construction and needed repairs. The study
assumed lowering existing quality standards and,
similar to the five-year plan, was based on real
economic growth of 7 percent, a sharp increase in
domestic savings, and higher utility rates to recover
costs and fund upkeep. All of these assumptions
appear increasingly unattainable.
Implications for the United States
US support for Egyptian efforts to improve domes-
tic services in Cairo should have positive political
payoffs. The Egyptian public is expecting President
Mubarak to improve living conditions, and Egypt's
leadership is looking to demonstrate visible benefits
from Egypt's close relationship with the United
States. Mubarak's personal requests for US aid to
improve water and sewer service underscore the
importance he gives to these issues. The US offer to
allocate $1.25 billion in aid funds over the next five
years for water and sewer projects has been favor-
ably received in Egypt. The next test will be the
difficult process of moving from this commitment
to concrete action.
Secret
27 May 1983
Improved public services should increase overall
economic activity and help the investment climate,
particularly for foreign investors. Difficulties in
securing hookups to basic services and the overall
problems of life in Cairo currently discourage these
investors. US help in the public services area thus
should have important spillover effects encouraging
economic growth.
the United States.
Increased US involvement is not without risk. The
Egyptian public is sensitive to foreign involvement
and to any appearance of Egyptian dependence on
other states. Opposition spokesmen will doubtless
charge that US involvement in the rehabilitation of
Cairo's public services gives Washington increased
influence over Egypt's economy and the daily lives
of Cairenes. A greater danger may lie in US
identification with problems that arise as the up-
grading of public services proceeds. If US-funded
construction projects are delayed by bureaucratic
obstacles, the risk of adverse criticism also would
grow. Balanced against these risks, however, is the
prospect that doing nothing to help meet Cairo's
needs would be ignoring a major concern of Egypt's 25X1
leaders and would also generate sharp criticism of
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North Yemen: In a Financial Bind
North Yemen has been living beyond its means for
several years, as evidenced in recurring budget and
balance-of-payments deficits. At recent rates of
depletion, foreign asset holdings will be gone by the
end of this year. Foreign aid has leveled off and
worker remittances-Sanaa's main source of for-
eign exchange-probably have peaked. President
Salih's economic problems are compounded by the
reconstruction needs stemming from last Decem-
ber's devastating earthquake and by an extensive
parallel economy based on smuggling and irrever-
ence for the central government.
Only a large infusion of foreign aid can alleviate
Salih's problems, but prospects for help are not
good. Salih's economic development program is in
jeopardy, and he probably will be forced to intro-
duce strict austerity measures. Virtually any eco-
nomic retrenchment or measures to raise additional
revenue, however, risk social discontent and erosion
of the regime's already narrow political base.
North Yemen's economy suffers from several struc-
tural defects that complicate efforts to deal with
the deteriorating economic situation. Much of the
population lives beyond effective government con-
trol, outside of poorly developed communication
and transportation arteries. The economy is based
largely on subsistence agriculture. Few commer-
cially exploitable minerals are known, and the
search for oil has proved fruitless. Sanaa has the
worst trade imbalance in the world, with export
earnings typically covering less than 1 percent of
the import bill.
Although substantial foreign exchange is received
through worker remittances, these earnings have
distorted more than benefited the economy. A labor
shortage was created in the 1970s by migration of
about 700,000 Yemeni workers-half the domestic
labor force-attracted by the economic boom in
neighboring countries. The worker exodus generat-
ed demand for foreign labor to replace the loss of
Yemenis, pushed up wage scales, and contributed
to deterioration of the country's agricultural base.
25X1
The migration also fostered the development of a
black market. Increased purchasing power afforded
by the wide distribution of worker remittances 25X1
stimulated unbridled import growth. Government
attempts to profit from the burgeoning consumer
demand through imposition of customs duties on
imports resulted in'dependence on remittances as
the largest source of foreign exchange and the chief
source of revenue. At the same time imposition of 25X1
customs duties, coupled with the government's in-
ability to control border areas, stimulated trade in
smuggled goods and illegal currency transactions.
According to the US Embassy, the scope of black-
market activity now siphons off substantial govern-
ment revenues and denies it needed foreign ex-
change.
Moreover, government hopes of channeling remit-
tances into productive investment have been only
marginally fulfilled. Because of political uncertain-
ty about the outcome of the confrontation with the
South Yemeni-supported insurgency, private inves-
tors have sought rapid returns from ventures in
retail sales or production of light consumer goods
and have shied away from investments involving
long-term payoffs. The government has carried the
burden of financing both the country's infrastruc-
ture and the infant industrial sector with little help
Secret
DI IEEW 83-021
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Secret
1978/79
1979/80
1980
1981
1982b
-619
-794
-1,247
-1,539
-1,902
-1,737
-967
19
7
3
7
13
11
NEGL
638
801
1,250
1,546
1,915
1,748
967
-56
-69
-36
0
-21
-51
-78
16
24
58
135
106
32
NA
922
1,140
1,145
1,211
1,232
1,126
778
312
112
148
337
343
818
1,039
833
1,099
1,084
789
435
Drawing on loans
54
81
114
124
466
262
NA
Repayment of loans
-4
-6
-10
-7
-15
-58
NA
Investments
12
41
43
25
NA
a Fiscal year. Fiscal year changed to coincide with calendar in 1980.
Previously, fiscal year was July-June.
b First six months.
Consists mainly of investment income from official reserves.
d Cash grants and value of commodity grants.
e Primarily workers' remittances.
from private enterprise. As a consequence, the
Yemeni industrial base is not sufficiently developed
to stem the consumer-led growth in imports
Tightening Finances
Steady deterioration in North Yemen's financial
situation has produced yearly budget deficits-over
$700 million last year. In the balance of payments,
rising imports have outpaced the main sources of
foreign exchange-grants, loans, and worker remit-
tances-necessitating foreign reserve drawdowns to
cover the difference. Although payments data for
Secret
27 May 1983
1982 are incomplete, reserves were drawn down by
$400 million, suggesting a balance-of-payments
deficit of the same magnitude. 25X1
Despite worsening economic trends, President Salih
in 1982 launched a five-year plan, which targeted 25X1
spending at $6.5 billion based on groundless expec-
tations that worker remittances would cover 33
percent of the costs and foreign aid 46 percent.
Aside from the foreign exchange leakage into the
black market, Salih ignored mounting evidence
that remittances had peaked because of economic
slowdowns in neighboring countries. He also failed
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Secret
Deficit
Financing of deficit
External e
Domestic f
533 783
442 483
91 300
537 992
278 410
259 582
-4 -209
4 209
63 123
-59 86
a Fiscal year. Fiscal year changed to coincide with calendar in 1980.
Previously, fiscal year was July-June.
b Provisional.
c Budgeted.
714
614
100
1,116
562
554
-402
402
117
285
826
1,066
1,190
678
729
856
148
337
334
1,527
1,569
1,900
656
723
910
871
846
990
-701
-503
-710
701
503
710
451
205
265
250
298
445
d Includes taxes and nontax sources.
e Project and commodity loans, minus repayments.
f Includes Central Bank, commercial banks, and statistical
adjustment.
to anticipate that falling oil revenues would reduce
foreign aid commitments from the Gulf Arabs. The
Yemenis unrealistically expected to receive about
$100 million annually from the Arab Development
Decade Fund but now probably will not even
receive a $70 million loan agreed to in 1982. They
had also banked on a $400 million loan from Iraq
that Baghdad clearly had little capability to deliv-
er. Sanaa's most important benefactor, Saudi
Arabia, typically gives about $200 million annually
for budget support and project development and
larger sums during military confrontations with
South Yemen. Given current Saudi revenue prob-
lems, however, we believe Riyadh is unlikely to
increase aid in the absence of another insurgent
threat against North Yemen or the prospect of an
outright economic collapse.
Relief from North Yemen's deteriorating economic
situation was made even more remote by a devas-
tating earthquake last December which left
300,000 people homeless and caused an estimated
$2 billion in damage to housing, schools, and
infrastructure. Appeals for foreign assistance gar-
nered only about $50 million-$30 million from
Saudi Arabia-prompting the Yemenis to make
further appeals for Saudi aid.
The stark reality now facing the Yemenis is a
financial gap of $1 billion for fiscal 1983, up from
their initial forecast of $720 million. Meanwhile,
foreign reserves have fallen to $500 million from a
peak of $1.6 billion in early 1979. To cope, the
government largely abandoned its budget-with-
holding funds from some ministries. The US Em-
bassy in March reported that mandatory "contri-
butions" had been deducted from civilian and
military personnel salaries, ostensibly for earth-
quake relief and support of Palestinian refugees,
and that some government salary payments were
three months late.
restrictions have been placed on imports and hard
currency transactions.
25X1
25X1
Secret
27 May 1983 25X1
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North Yemen: Selected Foreign
Economic Indicators
Balance-of-Payments Determinants
Million US $
0
~, ---Overall balance
-500
1976/77 77/78 78/79 79/80 80 81 82a
a Estimated.
b End of year.
c February 1983.
Further cuts in spending will have to be made.
Social programs such as medical care and educa-
tion probably will bear the brunt of the cuts
because most development funding is earmarked
for capital investment, which is externally financed
and tied to specific projects. New project starts also
will decline unless they are already funded. F_
Sanaa has not yet requested financial support from
the IMF, although the IMF reportedly has laid out
conditions that North Yemen must meet if it is to
qualify for large-scale loans. These include institu-
tion of a strict program to reduce government
expenses, devaluing the Yemeni riyal, and improv-
ing collection of taxes and customs duties.
Sanaa will have to curtail budget outlays in any
event but will be reluctant to adopt the other
conditions for fear of alienating the populace.
Devaluation would boost prices and is staunchly
Secret
27 May 1983
Official Foreign Assetsb
Million US $
opposed by the business community that deals in
legal imports. Increased customs duties would di-
vert even more trade to smugglers and probably
result in lower revenues for the government. The
government's ability to enforce tax collection tradi-
tionally has been weak; increased collection efforts
probably would have to be focused on government
employees, the military, and highly visible compa-
nies. Small businessmen, traders, and the popula-
tion outside of main cities could likely evade pay-
ment.
Lack of resources forced the government to make
two basic decisions about repair of earthquake
damage: (a) the cost of reconstructing housing (the
major loss) will be borne by the householders
themselves, and (b) the government will only restore
public services (water, electricity, clinics) to the
level existing before the earthquake rather than try
to upgrade them.
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President Salih is caught essentially in a no-win
situation. He cannot count on increased foreign aid,
and traditional economic prescriptions for the ail-
ing economy risk serious erosion of his political
support. For the most part, North Yemen's eco-
nomic problems demand long-term solutions. The
country needs to reduce its import bill by develop-
ing productive capacity in agriculture and domestic
industries. For this the government will have to
nurture confidence in the private sector. In view of
the chronic political instability, traditional Yemeni
aversion to government authority, and the propensi-
ty to opt for quick investment returns, progress on
this front will be slow.
A serious attempt to stifle smuggling would require
deploying troops to the northern border. Even if
this did not upset the Saudis, it would antagonize
the area's powerful tribes, who have the capability
to resist militarily. Moreover, the economic liveli-
hood derived from black-market activity will make
its participants inclined not to cooperate.
Earthquake victims constitute an additional prob-
lem. Economic atrophy and political alienation
within affected areas will be the consequence of
prolonged delays in building shelters or restoring
rudimentary public services.
Given the difficulty of these problems and the few
levers in Salih's hands, the prognosis over the next
year is a deepening of popular disaffection with his
government's performance and a corresponding
growth in government repression and reliance on
the military to protect the regime.
Secret
27 May 1983
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Secret
USSR and Eastern Europe:
Early Grain Crop Prospects
Both the Soviet Union and Eastern Europe appear
headed for good grain crops this year. Continued
favorable weather could result in a 220-million-ton
harvest in the USSR, while the East European crop
could reach 96-100 million tons-only slightly be-
low last year's record. Neither region, however, has
much chance of reaching planned targets of 238
million tons for the USSR and 112 million tons for
Eastern Europe.
Because of problems already encountered, Soviet
winter grain production-which accounts for about
USSR and Eastern Europe:
Grain Production
F-I
300
6
F]
25(
-
MCI
150
i
50
1973 74 75 76 77 78 79 80 81a 82b
a Data for USSR unofficial.
b Estimated.
Eastern
Europe
one-third of total Soviet grain output-will proba-
bly fall short of the 60 million tons averaged during
1978-82. Spring grains are off to a good start,
however, and if good weather continues, total grain
production could still reach 220 million tons. A
crop of that size could allow the USSR to begin 25X1
making headway on improving food supplies and
reducing dependence on Western grain-two long-
standing goals reaffirmed by the new leadership.n
According to information available through mid-
May, winter grain production this year probably
will be somewhat below average, reflecting a reduc-
tion in the sown area and prolonged unfavorable
growing conditions in several key regions. We
estimate that winter grains were sown on only 32.5
million hectares, an area around 10 percent below
plan and one of the smallest sown areas recorded in
the past decade. Planting was inhibited by near-
drought conditions last fall in parts of the southern
Ukraine, the North Caucasus, and the lower Volga
Valley, areas that typically produce about 30 per-
cent of the winter grain crop. Moreover, because of
inadequate soil moisture, seed germination and
prewinter plant development were poor. Crop pros-
pects are better in the winter rye areas to the north
because sowing occurred on time and soil moisture
levels have remained adequate. FI 25X1
We estimate that total losses of winter grains have
reached about 15 percent of the sown area, normal
for the USSR. Lack of moisture was chiefly re-
sponsible. The US agricultural counselor in Mos-
cow reported sizable drought damage in the
Ukraine, and
(many winter grainfields in
the southern European USSR emerged from dor-
mancy in poor condition. Stands were thin, growth
25X1
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hectares)
Harvested (million 32.2 26.5 32.6 29.3 31.9 27.5 b
hectares)
Implications./or Grain Imports. The prospects for
a continuing world grain glut will allow the USSR
to delay import decisions until the size of its crop
can accurately be determined. The head of the
Soviet grain buying agency recently told grain
traders that Moscow would be buying very little
grain on the world market this summer. As a result,
Moscow probably will repeat last summer's low
level of grain imports-under 6 million tons-to
keep internal transportation facilities free to handle
Production (million 85.9 49.6 63.1 55.0 b 55.0 b 60.0 d
tons)
tive forecast of 1983 grain production in the USSR
can be made with confidence.
the domestic harvest
a Winter wheat, rye, and barley.
b Estimated.
c Percent difference between sown and harvested area. Includes some
acreage used for forage.
d Upward limit.
uneven, and many fields were being resown to
spring grain. Three days of steady rain at the
beginning of May brought considerable relief to the
dry areas, but more precipitation is needed to
replenish subsoil moisture. Even then, winter grain
yields would be only slightly improved because
much of the damage is irreversible.
Because of the expected shortfall in winter grain
output, spring grains will play a larger-than-normal
role in determining the size of the 1983 grain crop.
Conditions are encouraging so far
imely rainfall has resulted in
initial plant development that is good to excellent.
Spring arrived two to three weeks early, enabling
the annual spring sowing campaign to get off to one
of the fastest starts ever. Planting in the majority of
the European USSR was completed ahead of
schedule, decreasing the likelihood of crop damages
from the summer's hottest weather. In the main
spring wheat areas east of the Ural Mountains,
sowing, as usual, got under way just recently. With
more than one-third of the spring grains yet to be
planted, however, it will be weeks before a defini-
Secret
27 May 1983
Eastern Europe
In contrast to the USSR, winter grains in Eastern
Europe are off to a good start. This, combined with
continued good growing conditions for spring
grains, could result in a total harvest of 96-100
million tons. Eastern Europe desperately needs a
good harvest because shortages of hard currency
and the region's concern over indebtedness to the
West have resulted in sharp cutbacks in grain
imports. Even a crop equal to the 1982 record of
101 million tons will not prevent a further deterio-
ration in food supplies for some countries in 1983.
25X1
Winter grain production, which provides about one-
half of Eastern Europe's total output, could well
25X1
exceed the 47-million-ton average. Warm, sunny
weather last fall allowed farmers in most countries
to complete sowing on time over a larger area than
the year before, and adequate rainfall promoted
25X1
fairly good plant development almost everywhere. 25X1
the crop was gener-
ally healthy as it approached ormancy. Further-
more, mild winter temperatures prevented major
damage, and winterkill losses from a February cold
spell in Poland and East Germany can be easily
made up by reseeding.
In contrast to crops elsewhere in Eastern Europe,
prospects for the winter grain crop of Poland are
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Eastern Europe: Grain Production a Million tons
Plan
Plan
Production
Eastern Europe
111.6
104.4
101.3 b
Northern countries
42.5
40.7
41.5
Czechoslovakia
11.0
11.0
10.3
East Germany
10.3
10.0
10.0
Poland
21.2
19.7
21.2
Southern countries
69.1
63.7
59.8
Bulgaria
10.3
9.5
8.2 b
Hungary
14.5
14.2
14.7
Romania
25.3
24.0
19.5 b
Yugoslavia
19.0 b
16.0 b
17.4
a Winter grains comprise 60 percent of total grain production in the
northern countries and 40 percent in the southern countries.
b Estimated.
probably only average. An autumn drought kept
the sown area 12 percent below plan and caused
spotty germination and weak plant development.
Although late fall and winter rainfall brought
relief, Poland will need a good spring grain crop if
it is to produce more than the 19-million-ton
average of recent years.
schedule in many areas.
With winter grains in good condition, favorable
prospects for spring grains increase Eastern
Europe's chances of achieving an above-average
total grain harvest. Mild March weather allowed
fieldwork and sowing operations to begin ahead of
spring grains emerged we .
Recent warm, dry weather in southeast Romania
and Bulgaria has decreased soil moisture to barely
adequate levels, however. Winter grain fields there
have begun to show damage. Unless plentiful rain
comes soon, grain yields there could be significant-
ly reduced
Secret
27 May 1983
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Sanitized Copy Approved for Release 2010/11/02 : CIA-RDP84-00898R000200080003-4