THE ECONOMIC SITUATION IN SOUTH VIETNAM

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001600040032-2
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 13
• Document Creation Date: December 12, 2016
• Document Release Date: March 7, 2002
• Sequence Number: 32
• Publication Date: February 1, 1971
• Content Type: IM

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Secret
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DIRECTORATE OF
INTELLIGENCE
Intelligence l~lerriorandum
The Economic Situation In South Vietnam
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ER IM 71-31
February 1971
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Copy No. ~; `= F~
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WARNING
'This document contains information affecting t}re national
defense of d~c United States, widen the meaning of Title
18, sections 793 and 794, of the US Code, as amended.
Its transmission or revelation of its contents to or re-
ceipt by an unauthorized person is prohibited by law.
GROUP 1
Ewduded from auromarlt
do.+np.adinp and
dedottiftorion
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~iJCRET
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CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
February 1971
The Economic Situation In South Vietnam
Highlights
Saigon prices increased before Tet, but by
8 February the USAID index had fallen slightly be 1 ow
the average level for December. Black market cur -
rency prices continue to be stable.
The money supply increased sharply in December,
bringing the increase for the year to 16$ -- much
higher than preliminary estimates.
President Thieu has signed the 1971 government
budget, but anticipated changes in spending and
revenue targets already have made it obsolete.
Joint US/GVN economic talks are continuing,
but few specific stabilization measures have been
agreed upon. With the exception of raising the
price of imported rice, it seems likely that no major
steps will be taken before the presidential election
this fall.
South Vietnam is expected to produce nearly
enough rice to feed itself this year. Imports are
expected to decline from 559,000 metric tons last
year to 100,000 tons in 1971. Continued reliance
on imports to supply some rice-deficit areas is
due more to marketing and distribution problems
than to production limitations.
Charts on money supply and prices, foreign
exchange reserves, import licensing, currency and
gold prices, and the government budget follow the
text.
Note: T tai`s memorandum was prepared by the Office of
Economic Research.
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SECRET
Prices
1. The average retail price level in Saigon
rose 3~ in January mainly as a result of increased
consumer buying for the Tet holiday celebration.
Following Tet, however, prices dropped even slightly
below the level of December 1970. During the three
months since the October reforms the average Saigon
price level rose 5~, compared with 13~ during the
corresponding period of a year ago.
2. Since the end of December, rice prices have
risen 6~ to 9~, but still are below the levels pre-
vailing in the spring of 1970. Saigon rice merchants
attribute the recent slow, steady increase in rice
prices to the general upward pressure on prices be-
fore Tet as well as to rumors that suspension of US
rice imports was immine7zt. It also is probable that
the rice trade is aware that the government soon
plans to raise the official prices of i3S rice (see
paragraph 7) and is anticipating this aiction by in-
creasing prices of domestic rice.
3. The USAID monthly average prise index for
imported items rose about 1~ between 29 December and
19 January. Data since 19 January are not yet
available. During 1970 the import price level rose
31~, while the general retail price :Level in Saigon
rose 30~. Excluding rice, however, import prices
rose 39~ last year.
Money Supply
4. Preliminary estimates of the growth of the
money supply in 19?0 (about 10~) proved to be overly
optimistic. Recently released data for December
show that the money supply rose 4~ in December,
bringing the increase for the tear to 16~. During
December, GVN deficit financing and private credit
extension continued to increase fairly rapidly, while
the growth of advance deposits for imports anc! time
and term deposits slowed considerably.
Black Market Currency Prices
5. Saigon black market currency and gold prices
continue to fluctuate within a very narrow range.
On 8 February the price of dollars was 395 piasters
per dollar, and the rate for MPC (scrip) was the
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same as the legal rate of 275 piasters per dollar.
The price of a dollar's worth of gold leaf was 495
piasters, the highest since early November. The
increase reportedly was due to a temporary halt in
gold smuggling from Laos as a result of tighter
airport security in Vientiane.
1971 Budget
6. On 20 January, President Thieu promulgated
the 1971 goverrunent budget, which sets expenditures
at 235 billion piasters ($855 million at the parallel
market rate of 275 piasters per dollar) and revenues
at 200 billion piasters, including 30 billion piasters
in US aid. The planned deficit of 35 billion piasters
which will have to be covered by deficit financing,
is roughly the same as the actual deficit in the past
three years. Thieu, however, signed the Lower House
version of the budget, which excludes any provision
for government wage increases that are anticipated
this year. The government, therefore, probably will
follow the normal practice of submitting later in
the year a supplementary budget to the National
Assembly, which could add as much as 30 billio:z
piasters to expenditures. Moreover, joint US/GVN
economic talks now under way probably will result ~n
revised revenue targets (see paragraphs 7 and 8).
Stabilization Talks
7. Talks between US and Vietnamese officials
concerninrr stabilization measures for 1971 have been
under way in Saigon since Decembar, but few firm
decisions have been made. Both sides have presented
a series of proposals affecting the exchange rate,
import and other taxes, interest rate policy, and
import licensing. General agreement seems to have
been reached on the following matters: selling sub-
stantial amounts of treasury bills to commercial
banks in order to reduce government borrowing from
the National Bank; increasing administrative revenues
from postage, telephone service, electric power, and
the like by 50$; raising perequation taxes on se-
lected imports; and reducing subsidies to government-
owned enterprises by placing them on a commercial
.footing. The GVN reportedly also has agreed to raise
the official price of imported rice early in March
to bring it in line with domestic rice prices. This
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step, originally planned fox December 1970, is de-
signed to encourage marketing throughout the
country of the now adequate supplies of domestic
rice. Concurrent with the price increase, the
government plans to give government employees a wage
~.ncrease in the form of a cash rice allowance.
Depending on the amount, the rice allowance will add
7 to 15 billion piasters to government expenditures.
8. The United States is urging the Vietnamese --
thus far without much success -- to open up import
licensing for still restricted luxury items such as
motorbikes and to shift all freight and insurance
charges as well as some additional imports from the
official exchange rate of 118 piasters per dollar
to the parallel market ratE of 275 piasters per dol-
lar. The parallel rate nor applies only to imports
of luxury goods, exports, invisible transactions
such as profit remittances, and purchases of piasters
by US personnel in Vietnam for their personal ex-
penditures. Both governments are exploring the
ramifications of shifting US government purchases
of piasters for official use to the parallel market
rate. These piaster purchases account for about two-
thirds of Vietnam's earnings of foreign exchange.
A change in the rate, therefore, would considerably
reduce the country's dollar earnings at the present
level of US piaster spending. Since the United States
has made a commitment to provide $750 million worth
of import financing in 1971, the shortfall will have
to be made up by increasing piaster spending for
items such as local procurement of goods and increased
reliance on local constructa.on contractors. The
net effect would be to leave South Vietnam's dollar
earnings unchanged but to increase claims on Viet-
namese resources, especially labor.
Self-Sufficient in Rice?
9. Rice deliveries from the Delta to Saigon
in 1970 totaled 399,000 metric tons -- the highest
level since 1965. They will have to increase con-
siderably this year, however, to around 700,000 tons
if the rice-deficit areas of the country are to be
adequately supplied without additional imports.
Only in 1963, the last year of significant exports,
were shipments out of the Delta more than 700,000
tons. Deliveries during 1960-65 averaged 563,000
tons per year. US agricultural specialists believe
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that production in the Delta surplus areas will be
great enough to supply the necessary shipments, but
no one can be sure that market conditions will b e
favorable enough or that transbort facilities wii 1
be adequate. Nevertheless, imports, which totale d
559,000 tons in 1970, are to be cut to about 100,000
toils this year. During the past five years, imports
ranged from roughly 15$ to 25~ of total rice
availability, but are expected to amount to only
3$ of supply this year.
10. In a recent study, US agricultural expert s
identified four major obstacles to eliminating
dependence on imports in the northern half of the
country -- the current low prices paid to Delta
farmers, the shortage and increased cost of com-
mercial credit to rice merchants, the near absence
of commercial contacts between merchants in the
Delta and those in Military Regions 1 and 2, and
the inadequacy of Delta port facilities and coastal
shipping to move the rice from the Delta to the
northern rice-deficit provinces. Paddy prices, which
reached an all-time high in late 1969 and held up
fairly well through early 1970, began to decline
slowly in mid-1970 and currently are about one-third
below the peak 1969 prices. Large-scale government
purchases of Delta rice this past year (almost half
of total deliveries) probab ly prevented an even
greater decline in paddy prices. Farmers reportedly
consider the price too Iow for profitable sales and,
now that the need for Tet money is past, probably
will be less willing to sell paddy cheaply. More -
over, because the price of pork rose sharply in 19 70,
farmers apparently diverted large quantities of ri ae
to livestock feed. A continuation of low prices for
paddy and high prices for hogs could promote further
diversion to livestock feed and leave less for sh i p-
ment out of the Delta. By early March, once the
main harvest is completed -- and especially if the
price of imported rice is increased -- paddy price s
may start recovering. Nevertheless, the government
may have to buy even larger amounts of rice this
year if the deficit areas are to be supplied, particu-
larly if merchants cannot get enough capital at a
reasonable rate to finance larger deliveries.
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11. The distribution of large quantities of
domestic rice to the rice-deficit areas presents
additional problems. There are not enough coastal
ships -- the least expensive and most secure means
of. transport -- to carry the volume of rice required.
Foreign exchange has been allotted to purchase two
2,000-3,000 ton vessels, but more will be needed.
In the interests of increasing efficiency and reduc-
ing graft, most economic officials would like to
see private commercial interests take over the rice
market in Military Regions 1 and 2. But wholesalers
have become dependent on the government -- the sole
importer of rice -- for their supplies and have very
few contacts with Delta millers and merchants. The
existence of an established government rice distri-
bution system in the northern provinces discourages
Delta merchants from trying to compete. Moreover,
as long as there still is imported rice available
at prices below domestic rice prices, there is no
incentive to market Delta rice.
12. Becoming self-sufficient again in rice
clearly will not be easy for South Vie~nam. The
government may become more and not less involved
in the rice market. Pricing and distribution
problems may result in the need for further imports
despite the fact that domestic output is expected
to be sufficient.
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SOUTH VIETNAM
Foreign Exchange Reserves*
,,,,, Million US Dollars
1965 1966
JANUARY 1965=100
SOUTH VIETNAM
o0o ndexes of Money Supply and Saigon Consumer Prices
900
t300
1967 1968
'Excluding holdings of commercial banks
Jan
718
Dec
526
'USAID monthly average retail price index for Saigon
"Data are for end of month
I I I I ~I I I I
JAN' FEB
1971
Dec
226
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IMPORT LICENSING
Million US Dollars
Commercial Import
Program
PL-480, Title I
GVN Financed
Jan-Jun 1ul?Dec
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SAIGON
Free Market Gold and Currency Prices
Piasters Per US Dollar
600 _ ._. j
GOLD Basis: gold leaf worth
$35 per troy ounce
^~~ US $10 GREEN
US $10 MPC Military Payment
Cortiticates (scrip)
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Advances from
~~_r_-..i o..-i.
Foreign Aid
Domestic Taxes
Import Taxes
1970 1971
Plan Plan
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