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IAA 14- V4. r Release 2000/ 40 118 ': DIA D085TO0875R001700070003-0 T kE: Less aeveloped, Countries Face the Approved For Release 2000/04/18 : CIA-RDP85T00875R001700070003-0 Confidential No Foreign 1)J .rew intelligence Memorandum The Less Developed Countries Face the Oil Price Problem Confidential ER IM 74.3 May 1974 Copy No. 41 Approved For Release 2000/04/18 : CIA-RDP85T00875R001700070003-0 Approved For Release 2000/04/18 : CIA-RDP85T00875R001700070003-0 NATIONAL SECURITY INFORMATION Unauthorized Disclosure Subject to Criminal Sanctions Classlfled by 015319 Exempt from general declassiflcntlon schedule of E.O. 11662, exemption category: ? 513(1), (2), and (3) Automnticelly declasslfled on: Date Impossible to Determine Approved For Release 2000/04/18 : CIA-RDP85T00875R001700070003-0 Approved For Release 2000/04/'(30 9 *DVJM E75R001700070003-0 No Foreign Dissem May 1974 The Less Developed Countries Face the Oil Price Problem Key Judgments ? Higher oil prices will increase the LDC oil bill by about $8.5 billion this year - the equivalent of' 2VO-311o of' their GNP. ? The LDCs have few opportunities to switch to alternative energy sources or to squeeze oil consumption without affecting output. ? Worsening terms of' trade could make it even more difficult to pay for oil imports. ? Shortrun reserve drawdowns and increased borrowing can cushion the adjustment this year but subsequently the burden will fall on non-oil imports, with a resulting loss in real income. ? The United States and other aid donors will come under increasing LDC pressure to grant additional assistance. Concessional food aid will be especially sought. ? The United States, the largest LDC creditor, will face rising demands for debt relief. US export growth will be adversely affected since part of' the LDC adjustment to higher oil prices will be to reduce imports, and the United States is a major LDC supplier. 25X1A Note: Comments and queries regarding this memorandum are welcomed. They may he directed to of the Office of' Economic Research, Code 143, 25X1A Approved For Release 2000/04)y8No &875R001700070003-0 Approved For Release 2000/01t 5 t0875R001700070003-0 Setting 1, For the non-oil producing LDCs as a group, 1973 was one of the best postwar years. With ar. unprecedented simultaneous boom in most industrial countries durigig 1972-73, primary product prices rose to record levels. The improved terms of trade led to sharply increased real income for most LDCs, as demand for both foodstuf'f's and industrial raw materials of all types boomed. Primary product export prices (excluding oil) rose about 50% during 1973. Since the prices of their industrial imports rose much less rapidly, the LDCs sharply expanded their imports while reducing the trade deficit. Net capital flows -- spurred by increased private investment -- also rose, and the LDCs were able to accumulate record foreign reserves. Net capital flows rose by $2 billion to $13 billion in 1972, and a similar rise took place last year. During 1972-73 the LDCs' aggregate foreign reserves doubled to $28 billion. 2. Although the recent prosperity was broad-based, a relative handful of' countries accounted for the bulk of (lie rise in reserve holdings. Several of the poorer food-importing LDCs clustered in Africa and South Asia were severely pinched by the sharp rise in food grain prices and failed to improve their position despite the rise in export prices. Ten countries with only one-eighth of LDC population accounted for three-quarters of' the $ 14 billion growth in reserves. Brazil alone took a third of' the rise. Another small group of Western Hemisphere countries, including Chile and Jamaica, and most Central and West African countries lost reserves. Reserves in the populous South Asian countries showed little change. The Oil Price Problem 3. The LDC oil import bill will leap by $8.5 billion to reach $13.7 billion this year if current prices hold and consumption stays at the 1973 level. Oil will reach about 15,x, of total imports, compared with 8% in 1973. Thus the expected oil outlay is equal to 24;r, of' total 1973 export earnings by oil-importing LDCs and 507 of their foreign exchange reserves. The rise in their oil bill equals about three-fourths of' total net capital flows to these countries from OECD nations. (For a discussion of the impact of' the oil bill, by region and country, see the Appendix.) 4. The LDCs wiH find it difficult to lower their import bill by reducing oil consumption. They collectively consume less that one-fifth as much oil as industrial countries, yet they are more dependent upon oil for energy than the developed world. Latin America, for example, counts Approved For Release 2000 WWiraAI#b IT00875R001700070003-0 Approved For Release 20 Q /Jt i) $5T00875R001700070003-0 on oil For nearly three-quarters of' its primary energy supply. Moreover, much LDC oil consumption is used by industry and for essential transportation. Relatively little is used for automobiles or home heating, and only small savings can be expected. The Problem Compounded 5. The import financing problem of the LDCs in 1974 and 1975 is likely to'be compounded by a worsening in their non-oil terms of' trade. Although LDC exports this year should increase, the rate of growth will slow sharply from last year's record 34%. Because of' the general economic slowdown in developed countries, raw material demand is expected to slacken and lead to lower prices. Thus far, speculative buying and normal inventory buildup have strengthened demand for most primary products. 6. For several important commodities - cocoa, tea, copra, edible and inedible oils, rubber, and timber -- which account for about 10`/o of total non-oil LDC exports, prices now appear likely to decline substantially. If the widely forecast upturn for the s^cond half of 1974 in developed economics is delayed or the downturn in the first hall' is sharper than is generally expected, commodity price weakness will he more pronounced and will spread to most exports (see 'f'able 1). Only natural fibers, because of shortages of' oil-based substitutes, and cereals appear likely to be largely immune to sharp prices declines this year and next. These products, however, account for less than 10'/: of' LDC exports. 7. To nlako the situation worse, prices for LDC imports of industrial goods will rise even more rapidly this year. Inflation in OECD nations has intensified, partly because of the working through of higher prices for energy and other raw materials. Industrial product prices are now beginning to accelerate sharply. The rise in industrial product export prices will probably exceed 15'%. This will lead to a deterioration in LDC non-oil terms of trade on file order of' 15`/,-20`% -- a loss of sonic $10 billion in purchasing power, or 15% of' 1973 imports; if the falloff in primary product prices is severe, the decline could be even greater. 8. Price tends will continue to pinch severely the food-importing LDCs. In Latin America, Chile, Peru, Guyana, and several Caribbean islands will be affected. In Africa, the Sahel, l 1hiopia, and Sudan will continue to be hurt, ac will India, Bangladesh, Pakistan, and Indochina in Asia. Because of' continued high population growth and crop problems caused by drought and fertilizer and fuel shortages, their need for food imports will remain high. For the same reasons, prices will stay higher I'or most f'oodstuf'fs than tor other primary products. This will intensify the terms of trade loss of these and other similarly situated LDCs. Most of' Approved For Release 200 Wf IO} f P 5T00875R001700070003-0 Approved For Release 2000/0411 WAM'31 0875 R001700070003-0 Export Prices of Major Product Categories 1973 19741 1971 1972 1st Half 2nd Half 1st Half 2nd Half Primary commoditIes2 105 119 154 200 1903 1753 Food and beverages 116 131 163 200 190 186 Agricultural raw materials 92 115 N.A. 235 241 206 Minerals and metals 102 104 121 168 157 142 Pctroleum3 132 146 187 242 754 675 Manufactured goods Selected prices 115 125 136 1563 1653 1753 Wheat 100 111 162 278 250 219 Rice 66 76 122 229 197 157 Maize 111 107 163 217 196 174 Sugar 128 173 201 216 243 213 Coffee 118 133 162 170 181 166 Cotton 118 124 N.A. 284 312 277 Rubber 80 77 128 190 207 156 Copper 84 84 115 164 137 123 Tin 107 114 129 165 174 158 Zinc 114 139 183 434 415 363 1, II3RD projections, 2. Excluding petroleum. 3. CIA estimates. these same countries were unable to boost their reserves substantially during the past two years and are particularly vulnerable to further dislocations. 9. The LDCs must also cope with tighter supplies and much higher costs of products derived from petroleum. These include synthetic fibers, plastics, chemical fertilizers, and synthetic rubber. Prices for these products could rise by 50% during 1974, and the supply shortage is likely to hold 1974 consumption to 90% of last year's level. Scarcities of oil-based fertilizers for rice producers throughout Southeast Asia may reduce output, which will limit agricultural exports by some countries and force imports of higher cost foods by others. When these costs are added to the basic oil bill, the burden on the LDCs exceeds by $10 billion the previous year's level. Approved For Release 2000/X49-N F F WW00875R001700070003-0 Approved For Release 2001/ 1jltfT00875R001700070003-0 10. The LDC's aggregate trade deficit will rise sharply during 1974. The oil price rise alone could push the deficit to an unprecedented $16 billion. While LDC non-oil terms of' trade are better now than at any time since the early 1950s, they are likely to worsen, which could widen the deficit substantiaily in 1975. Because OECD nations are also facing sizable deficits, the flow of official capital shows little prospect of rising much to cover this deficit -- unless oil producers provide substantial aid. Paying the Bill 1 1. The LDCs will have to cope with higher oil prices by drawing on reserves, increasing indebtedness, ~,nd curtailing imports. Over the longer term, increased domestic energy production is an option for some countries. Others, such as the bauxite producers, may try to emulate OPEC, but their success is doubtful. They generally lack the cohesion and financial resources necessary to cut production and exports. Moreover, most LDC exports are not as essential as oil. 12. Many LDCs have accumulated record foreign exchange reserves which can be used to pay the oil bill. Most LDCs will spend these reserves very reluctantly. Moreover, many of the harder hit nations, such as India, Sri Lanka. Chile, Uruguay, and the smaller African nations, have; only slim reserve holdings (see Table 2). 13. The more credit-worthy LDCs, such as Brazil, Turkey, and Taiwan, are those that have large reserves and in the short-run are least affected by increased oil prices. Although the share of Eurodollars loaned to LDCs has increased sharply in the last two years and larger deposits by the oil producers will increase the pool of funcs, many of' the poorer LDCs may be unable to obtain loans. Developed nations are also borrowing, and competition will be stiff. 14. The oil producers have shown a growing appreciation for the need to do something for the LDCs. Unless sustained aid from these countries materializes, a split may develop that would pit the non-oil LDCs against them. Thus far, oil-producer aid schemes are only in the formative stage. An OPEC proposal to form a "Special Development Fund" has yet to be ratified. Iran and Iraq have provided direct relief' on a bilateral basis to a few LDCs in which they have a special interest. These credit arrangements may become more widespread in the coming months. While loans will provide some relief' to the LDCs, this option cannot be used indefinitely. The debt-carrying capacity of the LDCs and their credit-worthiness would decline rapidly. Approved For Release 20&24iW-k5T00875R001700070003-0 Approved For Release 2000/04/16p PI P 0,75R001700070003-0 Oil Importing LUCs: Reserves and Oil Costs Reserves, Year End Additional Oil Cost 1971 1972 1973 Oil Cost 19741 as a Percent of Reserves Total 14.3 20.4 28.1 8.5 30 Latin America 4.9 8.6 12.6 4.0 32 Of which: Argentina 0.3 0.5 1.3 0.4 31 Brazil 1.7 4.2 6.52 1.6 25 Uruguay 0.2 0.2 0.2 0.1 50 Asia 5.7 7.3 9.4 3.1 33 Of Which: India 1.2 1.2 1.32 0.7 54 South Korea 0.6 0.7 1.0 0.7 70 Pakistan 0.2 0.3 0.5 0.3 60 Philippines 0.4 0.6 1.0 0.4 40 Thailand 0.9 1.1 1.3 0.4 31 Africa 1.7 1.9 2.3 1.0 43 Of which: Ethiopia 0.07 0.09 0.18 0.05 28 Ghana 0.05 0.11 0.19 0.07 37 Sudan 0.03 0.04 0.05 0.03 60 Zaire 0.15 0.18 0.24 0.06 25 Zambia 0.28 0.17 0.19 0,03 16 Other LDCs 2.0 2.6 3.8 0.4 11 1. Projcuted yearend. 2. November. 15. The only long-term solution, if oil prices remain high, will be to adjust imports and exports to eliminate most of the deficit. As time goes on, most LDCs will probably be forced to curtail imports because of the difficulty of boosting export volume. A slowdown of import growth, however, will present substantial difficulties. For most LDCs, the choice will be between current consumption and economic growth. Since financing is more available for capital goods, most LDCs will probably opt to cut consumption. Such moves will be painful. Inflation will be exacerbated regardless of the choices made, and greater political instability is likely as various factions vie for the chance to solve the problem their way. Approved For Release 2000/O &? f Ff?Jg0875ROO1700070003-0 11 XA-J Approved For Release 2000/04/18 : CIA-RDP85T00875R001700070003-0 CONFIDENTIAL Implications for the LDCs and the United States ? Reduced ability of sonic countries to pay for food imports ni,.eases the possibility of famine, especially in those already plagued by several years of drought. ? Slower growth in the poorer LDCs will heighten the disparity among LDCs and between them and the developed countries. This will eventually sharpen LDC stridency in international forums. ? Higher oil prices will also pit non-oil LDCs against OPEC states should OPEC fail to offer sufficient aid to buy them off. Unless arrangements such as Iran's concessionary oil deal with India becomes more widespread, a deep split could develop among the LDCs, and political support for the Arab cause in the Midd! East may be eroded. LDCs may case their restrictions on private foreign investment, particularly in the energy field. ? The United States will be increasingly pressed to grant more aid. Pleas for food aid will become stronger, and the LDCs will take their case to international forums. ? LDCs will press for commodity agreements to support the prices of their exports. ? The United States, the largest LDC creditor, will face increasing requests for debt relief. With the oil bill, many LDCs will be hard pressed to service existing debt requirements. ? LDC adjustment to higher oil import bills will slow US export growth to LDCs. Approved For Release 20~q 1~ 'j .jPk4 85T00875R001700070003-0 Approved For Release 2000/04/ $ORClblp" fT~O875R001700070003-0 APPENDIX IMPACT, BY REGION AND SELECTED COUNTRY Sub-Saharan Africa The oil import bill for sub-Saharan Africa's LDCs will triple in 1974 to an estimated $1.5 billion if last year's import level is maintained. All of the non-oil producing countries would be adversely affected, although the capability of individual countries to absorb the added costs varies widely. At least seven countries have foreign exch,mge reserves or':xpanding export earnings that could support the new oil costs for a year or so. Ethiopia, Tanzania, and Kenya have foreign exchange reserves sufficient to cover the added oil import costs. In addition, Kenya and Tanzania will earn increased revenues from their re-exports of imported crude as refined products. Zaire's small trade surplus will be reversed, the size of the deficit depending on the price of its copper exports. Zambia, Ghana. and Ivory Coast may still be able to maintain small trade surpluses in 1974, depending on trends in prices for copper, cocoa, coffee, and timber. The impact on the trade position and the economies of the remaining 32 oil-importing countries will be more severe. Total foreign exchange reserves in this group stood at little more than $600 million at the end of 1972. Their adverse trade balance that year totaled nearly $1.3 billion. Chad, the Central African Republic, and Mali are among the poorest of these, having combined foreign exchange reserves of only $15 million and imports in 1972 that were one-third larger than exports. Any weakening of export prices for primary product exports of the poorer countries -- iron ore, peanuts, palm oil, cocoa, and other agricultural products -- would further aggravate trade deficits. Without concessionary prices for oil imports or increased financial assistance on soft terms, an inevitable cutback in oil consumption and investment will slow the development of agriculture and tie small industries that make up the heart of the emerging modern sector. The most pronounced impact of the increased oil price is being felt in the South Asian countries - India, Bangladesh, Sri Lanka, and Pakistan - and the three war-torn nations of Indochina (see Table 3). The cost of 1974 oil imports to South Asian countries will rise to about $2 billion -- that is, the equivalent of existing foreign exchange reserves, or about double net development assistance annually disbursed by developed countries. Approved For Release 2000/O4~8&J f jT0D875R001700070003-0 Approved For Release 2000/04/18 : CIA-RDP85T00875R001700070003-0 CONFIDENTIAL Table 3 19731 19742 GNP Growth Balan ce of Reserves Rate 19731 Total Increase Total Trade 19731 31 December 19731 (Percent) Latin America Argentina 150 350 500 9 60 1,300 4 0 Brazil 850 1,650 2,500 .6 00 6.500 . 11 4 Caribbean SI5 700 1,215 N. A. N. A. . N A Central American Common Market and Panama 165 330 495 ?4 20 370 . . 5 0 Chile 120 210 330 ?34 8 300 . ?6 0 Mexico 85 185 270 -1,70 0 1,200 . 8 0 Paraguay 5 8 13 5 75 . 5 8 Peru 50 90 140 9 0 570 . 5 3 Uruguay 50 100 ISO 2 5 210 . 1 0 Near East Cyprus N.A. N.A. N.A. -1 7 300 . 1 5 Israel '75 50 125 -2,50 0 2,200 . N A Jordan 12 .... 12 -30 0 325 . . 8 0 Lebanon 40 90 130 -49 53 1,245 . 4 0 Morocco 40 1St, 170 -13 5 265 . 6 2 Turkey 175 475 650 -77 5 2,200 . 7 5 Africa Ethiopia 15 45 60 ?4 03 180 . 6 04 Ghana 20 65 85 11 53 190 . 4 04 Ivory Coast 20 70 90 13 53 88 . 8 04 Kenya 55 165 220 -17 03 233 . 6.D4 Tanzania 45 95 140 ?7 03 145 5 04 Zaire 20 55 75 4 53 240 . 7 04 Zambia 30 30 60 19 53 190 . 11 04 Asia Afghanistan 8 2 10 -5 0 60 . N A Bangladesh 60 90 150 -40 0 160 . . N A Burma 6 -I 5 -35 70 . . 2 0 Cambodia 9 27 36 -100 35 . N A India 485 715 1,200 -245 1,300 . . 5 0 Laos 10 -2 8 -55 N. A, . N A Pakistan 65 285 350 30 500 . . 5 5 Philippines 200 400 600 15 1,000 . 8 0 South Korea 300 700 1,000 -675 1,020 . 17.0 South Vietnam 80 70 150 -655 185 N A Sri Lanka 25 75 100 -45 85 . . 2 5 Taiwan 175 600 775 680 1,880 . 12 0 Thailand 200 400 600 -490 1,300 . 5.0 1. Estimated, 2. Projected. 3. Data are for 1972. 4. Data are for 1971. Approved For Release 2 0/ JbECR; P85T00875RO01700070003-0 Approved For Release 2000/04/18 : CIA-RDP85T00875R001700070003-0 CONFIDENTIAL Petroleum price hikes are cornpounding payments problems encountered by South Asian countries struggling to finance costly foodgrain imports necessitated by the 1972 crop failure. India faces considerable hardship and a setback to its gradual recovery from the recent economic slump. Reduction in the use of oil and fertilizers will impact heavily on the agricultural sector, and India is not expected to improve its food self-sufficiency. India will require more than $1 billion additional foreign aid to avoid cutting back essential imports, even with concessions and the financial assistance garnered so far. Similar difficulties experienced by Sri Lanka, Bangladesh, and Pakistan will be compounded by soaring inflation. FuA Burma, Cambodia, Laos, and South Vietnam, increased oil costs add one more burden to an already difficult economic situation. Even before the oil price hikes, prospects for expanded exports and improved living standards were poor. Unless foreign aid increases sharply, economic activity in these countries will be slowed by reduced imports. Most other Asian LDCs will be able to weather the impact of increased oil import costs without severe difficulty. The Philippines is representative of this group. Although its leaders must remain particularly aggressive in lining up credit to offset its small net foreign exchange holdings, total imports and economic growth need not fall much below 1973's good performances. Of more concern will be the impact of imported inflation on domestic political conditions. The sorts of stabilization measures likely to be introduced could cause considerable dissension without significantly contraining price increases below 30% to 40%. Other countries - for example, Thailand, South Korea, and Taiwan - have a more substantial exchange reserve base and better credit positions and may accordingly be able to manage their stabilization problems with somewhat more latitude. Bangladesh Petroleum outlays in 1 74 will approximate $150 million, 2-1 /2 times last year's expenditures for approximately the same import volume. Although Bangladesh, a Muslim country, is a prime candidate for concessionary arrangements with petroleum-exporting states, none have yet materialized. Without price concessions, import costs in 1974 will increase an estimated 27% to about $800 million, as Dacca would like to hold import volume to at least last year's level. Prices for Bangladesh's principal exports, jute and jute goods (85% of total exports), increased about 10% last year. Prices will continue increasing in 1974 but not nearly enough to offset increased import prices. Export revenues in 1974 are expected to be on the order of $350 million, leaving a potential trade deficit of $450 million. Foreign exchange reserves of about $160 million clearly will not be used to finance this year's deficit. Although little information is available on Approved For Release 2000/"O iJW XL00875R001700070003-0 Approved For Release 2000/04/18 : CIA-RDP85T00875R001700070003-0 CONFIDENTIAL foreign aid availabilities, the amount probably will be well below $450 million, thereby forcing a cut in imports. In turn, reduced imports will frustrate significant economic development. New Delhi is desperately seeking relief' from its soaring oil bill by restricting consumption to the 1972 level, soliciting concessionary terms from major suppliers, and spurring domestic energy production. As things now stand, imports of' 260,000 b/d of' crude and 40,000 b/d of products will cost an estimated $1.2 billion (see Table 4), about one-third of projected export earnings, for the present fiscvl year ending 3I March 1975, compared with about $485 million, or 161/o of' earnings, last year. India: Estimated Balance of Payments Million US S 19721 19731 19741 Exports (f.o.b.) 2,605 3,000 3,400 Imports (c.i.f.) -2,396 -3,245 -4,655 Foodgrain -78 -600 -700 Petroleum -271 -484 -1,200 Fertilizer -120 -200 -500 Other -1,927 -1,961 -2,255 Trade balance 209 -245 -1,255 Other transactions -939 -976 -1,010 Debt rcpay.nent -681 -718 -755 Other, nett -258 -258 -255 Overall deficit -730 -1,221 -2,265 Financed by Food aid 3 200 200 Foreign aid3 883 950 N.A. Transactions with the IMF, net .... 75 375 Aid from Iran and Iraq .... .... 250 Total 896 1,225 825 Change in reserves 166 4 N.A. Additional financing needed 1,440 1. Fiscal year, beginning I April of stated year. 2. Including invisibles, autonomous capital movements, and errors and omissions. 3. Including debt relief. Approved For Release ff4D IA P85T00875R001700070003-0 Approved For Release 2000/04/18 : CIA-RDP85T00875R001700070003-0 CONFIDENTIAL Indian officials have been scrambling all over the Persian Gull' to o11 ; in oil on concessionary ternis. New Delhi is attempting to negotiate long-term loans, payment with Indian goods, and a wide range of joint ventures in an effort to improve access to Arab oil. India also is seeking tnaximum loan and debt relief' from the World Bank. In addition, New Delhi has enlisted Soviet technical assistance to accelerate its oil development program and to increase the production of coal. Petroleum accounts for about 25% of commercial fuel consumption and is used principally by industry and transport. Although New Delhi heavily taxes nonessential uses of petroleum to restrict constunption, petroleum usage has been rising at about 8% to 10'% annually. Reduced petroleum supplies in 1974 cannot be replaced by coal and electric power, which will continue to be in short supply. Industrial production is stagnating and shortages of petroleum will slow the country's recovery. In addition to increased import costs for petroleum, higher costs for fertilizer, food, and other developmental imports will push India's 1974 import bill up 43'% to about $4.7 billion. Fertilizer prices have more than doubled. To maintain the 1973 volume of fertilizer, imports will cost New Delhi $.')v0 million in 1974 -- a $300 million increase. Although foodgrain imports ultimately will depend on the rains from this year's summer monsoon, current estimates are 4 million metric tons, about the same volume as last year, costing an additional $100 million. To maintain the country's remaining purchases abroad at about last year's volume will cost an additional $300 million. Exports alone cannot pay these greatly increased import costs. Prices for most of the country 's major exports have increased at a much lower rate than import prices. Cotton textile prices have increased about 25i(%, and those for jute manufactures about 15%. Further im;,-rases are likely in 1974 because of higher prices for synthetics. Tea prices, however, have stagnated. While other exports will benefit from higher world prices, India's total sales abroad will increase only 13% to $3.4 billion in 1974. India's estimated overall balance-of-payments deficit of $2.2 billion is expected to be reduced about $825 million by ? the $200 million remaining Soviet food loan, ? the $250 million oil concession from Iran and Iraq, and ? the use of a $375 million International Monetary Fund (IMF) standby credit, which currently is being considered by IMF officials. Approved For Release 2000/0 ?1 X)-&8 A6875 R001700070003-0 Approved For Release 2000/04/18 : CIA-RDP85T00875R001700070003-0 Co NFII)EN'UTAL Iran, which normally supplies about 70'Y% of India's oil imports, has agreed to supply an estimated 48,000 h/d of crude oil annually for five years. The cost of the crude -- more than $11 per barrel - will be slashed by easy payment terms requiring a $3.50 per barrel downpayment and, following a five-year in oratorium payment of the balance, over an additional live-year period at 2.5% interest. A similar Iraqi agreement reportedly will provide 56,000 b/d in 1974. These two agreements will supply India with a total of 104,000 b/d of crude in 1974 at a balance-of-payments savings of more than $250 million. After accounting for the assistance currently available, New Delphi will still face a remaining deficit of $ 1.4 billion. With foreign exchange reserves of about $1.3 billion, the equivalent of only about three months' imports at 1974 levels, the government will be reluctant to maintain imports by drawing down reserves. Unused non-project aid o" about $450 million cannot be drawn clown rapidly, because the bulk of it is tied to specific products and countries. On balance, New Ue:hf probably would need more than $1 billion additional foreign aid in 1974 to maintain last year's import volume. For South Vietnam, Cambodia, and Laos, totally dependent on imported oil, higher petroleum prices and financing difficulties add another burden to economics already beset with problems resulting from military disruption. Per capita incomes in real terms probably are little changed from those of' a decade ago. Moreover, all three couWries depend heavily on foreign aid and possess few IF any export commodities whose prices will keep pace with the rising prices of imported goods. The most important source of import financing for these countries -- foreign aid -- has declined in rail terms in recent years as the value of this aid has failed to keep pace with increasing dollar import costs. The anticipated doubling of oil import costs in 1974, along with increases in other import costs, will seriously wor;Crn the problem. South Vietnam's overall import prices are expected to increase by as much as 35% in 1974, bringing the total import bill to nearly $1 billion. Exports are optimistically predicted to reach $100 million this year. Unless US aid increases markedly from the current level of about $500 million, the volume of imports will have to be further reduced. The South Vietnamese government has taken a variety of relatively successful conservation measures (short of direct rationing) to cope with petroleum shortages, but the impact on the economy still will be serious. Approved For Release 261f/IEbT(AP85T00875R001700070003-0 Approved For Release 2000/04/18 : CIA-RDP85T00875R001700070003-0 CONF11)EN'1'1AT, I'vcn though petroleum supplies will rtlntosl cerlahtly he cut by South Vietnam's oil bill will increase by $ 150 million. South Vietnam's small inchrstr?ial sector, already in a slump for the past Iwo years, is especially vulnerable to reduced supplies and higher costs, I'uel shortages and price increases also are creating problems in agriculture. Since the mid-1 )6Os the introduction of hit,h-yielding rice varieties and file increasint, availability of aid-I'imurced fertilizer and agricultural machinery imports have raised firm incomes and made the country's fnm ling much more dependent on oil niid oil-based products. A cost squeeze oil farmers will discourage increased commercial production. The forestry ail fishing industries, which accounted I'or almost half of South VietnaM's commodity exports last year, also are feeling the impact ot'sntallcr I'ticl st.npNes and higher costs. Curtailed activily will reduce output in these industries and could lead to foreign exchange earnings well below earlier au ticilrat':d levels. Cambodia, already experiew ing rampant inflation and severe commodity shortages, will be in an even more precarious position as a result of the oil crisis. Petroleum imports currently are financed by US aid, and unless additional aid sources are found, additional oil cutbacks will be required, production will decline further, and inflation will worsen. Laos too will face more inflation and reduced supplies. Phlllpp%IW S The Philippine economy, coming out of a good year, is in increasingly good shape to cope with the oil problem for 1974, at least. In 1973 the economy rebounded from the impact of floods and drought in 1971, under the impetus of' unprecedented price increases for its major exports (sugar, coconut products, copper, anti timber). The trade balance turned from a deficit to surplu.;, and foreign exchange reserves jumped from $400 million to $1 billion. In 1974, higher petroleum prices will raise imports by more than $400 million. At the same time, imports of products other than oil will rise sharply as a result of substantially increased government investment and higher prices for metals, machinery, transport equipment, and chemicals. An increase of 40%-50% in the value of total imports seems likely. Export earnings in 1974 will probably decline by 5% to I0%. A sharp reduction is expected in the quantity of coconut products exported. Sales of other products -- copper and timber, for example - are likely to grow more slowly than last year because of less buoyant expansion in various developed countries. The trade balance probably will go into the red by about $600 million. Approved For Release 2000/ - 5TO0875RO01700070003-0 Approved For Release 2000/04/18 : CIA-RDP85T00875R001700070003-0 CON VIi)1'N1'IAL, Most of this (let ,iciI, however, probably will be covered by ol'I'icial aid, (fired foreign investment, "111" long-term loons. UI''iuial I'oreit;n :11d is likely to continue at the recent rate oI' ;about $200 million a year, The accelerated search I'm oil aa,&I other, raw materials will attract more foreign capital. With its improved credit stint;, the Philippines recently has had little dil?ficulty negotiating long-term revolving credits of $500 million from hark consortia ir, liurol?; , Japan, and the United States. It Is now seeking further loans of this kind. ''Iwse receipts of capital should make a precipitous drawdown of I'or?eign reserves unnecessary. Nevertheless, higher import prices are likely to slow economic growth to perhaps a 5i