INTERNATIONAL ECONOMIC & ENERGY WEEKLY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP88-00798R000100150007-0
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 54
• Document Creation Date: December 22, 2016
• Document Release Date: October 29, 2010
• Sequence Number: 7
• Publication Date: August 16, 1985
• Content Type: REPORT

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~eere~
Intelligence 25X1
Weekly
International
Economic & Energy
DI IEEW 85-033
/6 August 1985
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Secret
International
Economic & Energy Weekly
16 August 1985
iii Synopsis
1 Perspective-Commercial Bank Lending: A Growing Dichotomy
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Nicara ua: Co in With the Economic Crisis ~~ 25X1
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11 Indonesia: Attacking Domestic Inefficiencies
15 Tropical Timber: Intense Competition for a Declining Resource
21 Gulf Cooperation Council: Economic Integration Efforts
Energy
International Finance
Global and Regional Developments
National Developments
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Comments and queries regarding this publication are welcome. They may be 25X1
directed to Directorate of Intelligenc 25X1
i Secret
DI /EEW 85-03.?
16 August 1985
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Secret
International
Economic & Energy Weekly 25X1
Synopsis
1 Perspective-Commercial Bank Lending: A Growing Dichotomy
While the overall pace of bank lending continues to decelerate, creditworthy
countries such as Thailand, Algeria, South Korea, and East Germany still
enjoy access to international capital markets and have raised considerable
amounts this year-often at favorable rates., For those countries experiencing
foreign payments difficulties, however, there is little hope for any significant
upturn in voluntary lending over the near term.
0 3 Medium-Term Oil Market Outlook
OPEC will have a difficult time preventing a further drop in oil prices over the
next 18 months. Downward price pressures could ease in the 1987-88 period if
demand for OPEC oil rises, but ample capacity will keep market conditions
soft.
7 Nicaragua: Coping With the Economic Crisis
The Sandinista leadership is now far more openly admitting Nicaragua's
growing economic difficulties. Only a massive increase in aid from the Soviet
Bloc is keeping the economy from collapsing but even this influx is only
slowing, rather than reversing the deterioration.
11 Indonesia: Attacking Domestic Inefficiencies
President Soeharto is continuing his dramatic overhaul of Indonesia's ineffi-
cient economy in an effort to promote development of an internationally
competitive manufacturing sector and to reduce dependence on oil earnings.
We believe, however, Jakarta will eventually have to tackle reform of its tariff
system to avert serious foreign payments problems later in the decade.
15 Tropical Timber: Intense Competition for a Declining Resource
Intense competition among the leading timber exporters-Malaysia, Indone-
sia, and the Philippines-has created a depressed market for tropical wood
characterized by restrictive trade practices, smuggling, and rapid resource
depletion. In addition to pressures from the United States, Japan-the largest
market for wood-faces increasing demands from Southeast Asian exporters
for greater market access.
iii Secret
D/ IEEW 85-033
l6 August 1985
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21 Gulf Cooperation Council: Economic Integration Efforts
Although recent attention has focused on security coordination, the GCC has
set the framework for economic and commercial ties, taken steps to link the in-
frastructure of the member states, and begun testing its powers as an
international economic entity.
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International ~
Economic & Energy Weekly 0 25X1
16 August 1985
Perspective Commercial Bank Lending: A Growing Dichotomy
Since early 1984 it appears commercial banks are treating individual develop-
ing and East European countries differently in their lending. While the overall
pace of bank lending continues to decelerate, creditworthy countries such as
Thailand, Algeria, South Korea, and East Germany still enjoy access to
international capital markets and have raised considerable amounts this
year-often at favorable rates. For those countries experiencing foreign
payments difficulties, however, there is little hope for any significant upturn in
voluntary lending over the near term.
To generate savings on debt service costs, we believe many borrowers will
move away from syndicated loans and toward security-related transactions-
floating rate notes, bonds, and commercial paper-which are less costly
because the borrower raises funds directly from the capital markets. Such
financing has provided a sizable portion of the $7 billion borrowed by Asian
LDCs so far this year. Traditional syndication borrowers such as Thailand,
Malaysia, and Indonesia have turned increasingly to security-backed transac-
tions to fill their borrowing requirements at below LIBOR rates. In contrast,
the market for syndicated loans is shrinking. It remains strong in Eastern
Europe, however, where there has been a dramatic resurgence in borrowing.
Syndicated credits to Bulgaria, Czechoslovakia, East Germany, and Hungary
thus far in 1985 are approaching the total for the region over the past three
years. Nonetheless, commercial banks are shunning troubled debtors such as
Poland, Yugoslavia, and Romania.
The prospects of most borrowers remain severely constrained with most new
lending associated with rescheduling agreements and IMF programs. For
debt-troubled LDCs, short-term trade finance remains the only source of
voluntary commercial bank lending. As a result, LDCs continue to experience
a net outflow of funds as these new short-term trade credits are being more
than offset by repayments of existing loans. New money packages arranged as
part of IMF-supported adjustment programs brought considerably more
money into the LDCs-$9 billion to Brazil and Mexico alone-but net bank
exposure was up less than 2 percent in 1984 partly because of debt repayments
and partly because some loans were written off as losses.
Over the near term, the activities of both borrowers and lenders in the
international capital markets will be marked by caution. Commercial bankers
will attempt to limit their exposure, even in those countries that have avoided
debt servicing difficulties. At the same time, the developing countries that
have accomplished some significant external payments adjustments will
exercise borrowing restraint of their own.
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DI /EEW 85-033
16 August /98S
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Medium-Term Oil Market Outlook
OPEC will have adifficult-time preventing a
further drop in oil prices over the next 18 months.
Prospects of continued weak oil consumption and
rising non-OPEC supply availability will keep de-
mand for OPEC oil at or below the group's current
production ceiling. The key to preventing a major
price decline is producer discipline. Thus far Saudi
Arabia has borne the brunt of production cuts
needed to maintain prices, but
it will no longer singlehandedly
Non-Communist Oil Supply, 1979-85
act as the organization's swing producer. Financial 40
pressures will make it difficult for a number of
OPEC countries to remain within their production
quotas for any extended period. Downward price
pressures could ease in the 1987-88 period if de-
mand for OPEC oil rises, but ample capacity will
keep market conditions soft. Although the impact
of an oil price decline would generally be favorable 10
for the world economy, a sharp fall in prices could
require some economic and political adjustments. o
Weak oil demand, rising non-OPEC supplies, and
substantial excess production capacity in OPEC .
countries are causing downward price pressure.
Conservation and substitution kept non-Communist
oil consumption in first-half 1985 about 1 percent
below year-earlier levels and more than 500,000
b/d lower than most oil companies expected. At the
same time, non-OPEC supply, which approximated
26.8 million b/d during first-half 1985, was up
about 500,000 b/d from average 19841evels. Weak
demand pushed OPEC crude oil production down
to 14.5 million b/d in June, including only 2.5
million b/d in Saudi Arabia. In an attempt to
placate the Saudis and relieve market pressure on
heavy crude prices, a majority of OPEC members
agreed in July to reduce heavy crude prices by as
Of which:
Saudi Arabia
much as 50 cents per barrel. Meanwhile; spot
prices remain $1 to $2 per barrel below official
levels.
The Outlook for OPEC Through 1986
Non-Communist Consumption. We expect non-
communist oil consumption to register little or no
increase and approximate 45 million b/d in both
1985 and 1986 in response to slower economic
growth and continued conservation and substitu-
tion. Oil consumption in OECD countries as a
group is expected to remain at or below 1984 levels
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DI IEEW 85-033
16 August 1985
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1983a 1984b 1985b
a1983:
February-March. OPEC agrees to reduce benchmark oil price $5 per barrel and set
crude oil production ceiling of 17.5 million b/d. -
b 1984:
March-June. Iraqi-Iranian attacks on oil tankers keep demand for OPEC oil .high.
]uly. Excess inven[ories, continued high OPEC production, and rumored Saudi batter
deal cause sharp fall in spot prices.
in both 1985 and 1986 in response to continued
substitution. Consumption in the LDCs is expected
to rise by a few hundred thousand b/d in both
years.
Non-OPEC Oil Supplies. Industry forecasts pro-
ject that non-OPEC oil production, including natu-
ral gas liquids and net Communist exports, will
increase nearly 1 million b/d in 1985 to about 27.2
million b/d. About 500,000 b/d of this increase is
expected to occur in the non-OPEC LDCs
Brazil; Egypt, India, and
Oman probably will account for approximately
three-fourths of the increase in LDC output. Most
industry forecasters estimate non-OPEC supplies in
1986 will increase by only about 500,000 b/d above
1985 levels. All of the increase in supply in 1986 is
Actual Crude Oil Production
Versus Production Ceiling
Million b/d
20
14 1983a 1984b
1985b
October North Sea producers and Nigeria cut oil prices 51.35 to 52 per barrel OPEC
holds special ministerial meeting, cuts production ceiling to 16 million b/d.
December-January. After several false staffs, OPEC agrees to realign differentials.
Price of former benchmark crude, Arab Light, falls SI per banal. OPEC members
also agree to retain an independent auditor to monitor members' production.
expected to occur in the developing nations, while
OECD production holds relatively flat.
Inventories. We estimate that primary oil stocks at
the end of June 1985 stood at 4.0 billion barrels-
the equivalent of about 92 days of consumption-
and 100 million barrels above planned levels. Gov-
ernment-owned stocks account for about 600 mil-
lion barrels of the total, or about 14 days' supply.
Expectations of lower oil prices and continued belt-
tightening by the oil industry suggest oil companies
will attempt to pare excess inventories in 1985. We
assume non-Communist oil stocks will decline by .
600,000 b/d in 1985 and will hold steady in 1986.
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Non-Communist Oil Demand and Supply Outlook
Consumption
Inventory change
Supply
OPEC
Non-OPEC
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Total
46.8
44.1
43.7
45.8
45.1
- 1.3
. 2.0
0.6
- 1.3
0
45.5
46.1
44.3
44.5
45.1
19.6
20.0.
18.2
17.8
18.9
25.9
26.1
26.1
26.7
26.2
Demand,jor OPEC Oil: Given our estimates of
consumption,.non-.OPEC oil production and inven-
tory trends, demand for OPEC oil-including
about 1.3 million b/d of natural gas liquids-will
approximate only 17 million b/d in 1985 and 1986,
causing demand for OPEC crude to remain at or
below the organization's current 16 million b/d
ceiling. This forecast indicates revenue pressures
on OPEC members will mount; we estimate that at
current prices OPEC production would have to
average about 21 million b/d in 1986 to prevent a
further decline in the foreign exchange reserves of
member countries. Moreover, demand for OPEC
crude could fall substantially below the quota in
response to seasonal changes in consumption. In
addition, completion of Iraq's spur line to Saudi
Arabia by early 1986 could add another 500,000
b/d to. world oil supplies.
The world oil demand outlook suggests OPEC will
have difficulty holding the line on prices. While
predicting the magnitude and timing of possible oil
price declines is difficult, we have looked at several
possible scenarios:
? The organization's options for restoring price
stability are limited, but OPEC could maintain
nominal prices if Saudi Arabia continues its role
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Total
46.8
43.3
43.3
45.9
44.8.
-2.3
0.4
0.2
-0.8
-0.6
44.5
43.7
43.5
45.1
44.2
17.8
16.7
16.1
17.5
17.0
26.7
27.0
27.4
27.6
27.2
0
44.8
17.2
27.6
as swing supplier and OPEC cohesion increases.
Unless demand for OPEC oil rebounds in re-
sponse to higher oil consumption, or lower non-
OPEC supply availability, this scenario is
unlikely.
? OPEC members continue to undermine the offi-
cial price structure, forcing a series of minicrises
and price cuts that allow a controlled descent.
Saudi Arabia engineers several small price cuts
that cause temporary periods of renewed OPEC
discipline, but overall some members-Nigeria
and Ecuador, for example-produce above ceil-
ing levels and many producers discount oil as spot
prices fall. Many industry sources expect this
scenario to develop.
? A price collapse would result if OPEC's disci-
pline breaks down completely. Under this scenar-
io, widespread cheating by other OPEC members
causes the Saudis to stop supporting prices. Ri-
yadh gambles that a sharp price break will force
greater producer cooperation and is needed to
ensure a rebound in oil demand. The short-term
revenue losses to other oil producers and the
associated political impact on the Saudis, howev-
er, would be extremely costly. The probability of
this scenario would increase if oil consumption
trends downward. We are uncertain how far
prices would fall in this case but some industry
experts believe prices initially could fall well
below $20 per barrel.
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Market Prospects Beyond 1986
The outlook for oil prices in 1987 and 1988 will
depend primarily on the way events unfold in 1985
and 1986. Under most circumstances we believe the
market will remain soft and real oil prices will
continue to fall. Assuming annual economic growth
in the OECD averages, 2.5 to 3.0 percent, non-
communist oil consumption is expected by most
market forecasters to increase only slowly, perhaps
by 1 percent annually or roughly 500,000 b/d.
Conservation gains, increases in non-OPEC sup-
plies, and substitution away from oil are expected
to continue-albeit at a declining rate. Most indus-
try forecasts expect non-OPEC supplies will peak
during the period as expected declines in US
production and in Communist oil exports offset
increases in LDC production.
Under these conditions, demand for OPEC oil
could increase slowly to perhaps about 18-19 mil-
lion b/d by 1988 and help encourage producer
cooperation. Nevertheless, we expect excess avail-
able capacity to keep market conditions soft
through 1988 and cause a further. erosion in real oil
prices. A very sharp fall in nominal oil prices in
1985 or 1986 would hasten adjustments both in
excess supply capacity and in demand by slowing
substitution and conservation worldwide.
Implications
The impact of an oil price decline would generally
be favorable. Lower prices would accelerate eco-
nomic growth, dampen inflationary pressures, and
reduce Soviet hard currency earnings. A price drop
to $20 per barrel would improve the OECD trade
balance by lowering the oil import bill. by roughly
$47 billion. Oil importing LDCs would benefit
through lower import prices, higher demand for
their exports, and lower interest rates.,Respite from
their financial burdens could improve prospects for
political stability in some of these countries.
A sharp fall in oil prices, however, could create
problems that would require some economic and
political adjustments. Sharply lower oil prices could
renew strains in the financial community as already
indebted oil exporters endure new hardships. At
$20 per barrel OPEC oil revenues would fall about
$39 billion. Mexico, Nigeria, Egypt, Venezuela,
and Indonesia would be especially hard hit given
current financial problems: Development plans for
some nonoil fuels would be postponed until the
market stabilized, and pressure on banks with
substantial energy-related loans could increase. In
addition, development of North Sea natural gas
could be delayed opening the door .for. greater
Soviet penetration of the West European gas mar-
ket in the 1990s. In the longer term, lower oil prices
will slow conservation and substitution, hastening a
return to a period of high industrial country depen-
dence on insecure Persian Gulf oil supplies.
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Nicaragua:
Coping With the
Economic Crisis
The Sandinista leadership is now far more openly
admitting Nicaragua's growing economic difficul-
ties. Initiatives to stem declining living standards
have been largely ineffective because the regime is
unable or unwilling to address the main causes of
the problem-increased military spending, mis-
management, and restriction of the private sector.
Only a massive increase in aid from the Soviet Bloc
is keeping the economy from collapsing but even
this influx is only slowing, rather than reversing,
the deterioration.
President Ortega has publicly acknowledged an
inflation rate of 125 percent-we believe it is
currently running at over 200 percent at an annual
rate-and other officials admit that living stan-
dards have plummeted because of lagging wage
increases. In 1985, wages have increased only
about 80 percent.
Ortega claims the military's share has risen from
25 percent to 40 percent within the past year.
This diversion of resources from civilian industries
is crippling the economy in key areas. We estimate
that GDP fell 5 percent last year and continues to
decline this year. Press reports indicate cotton
planting is down 13 percent from 1984, largely
because state prices are too low to encourage
private growers. Dairy and meat production has
dropped sharply. Better prices in neighboring coun-
tries have led to increased cattle smuggling. Nica-
ragua is now importing meat from the USSR.
Haphazard Policy Initiatives
Efforts to resolve economic problems have been
inconsistent. To cut the budget deficit, Managua
eliminated consumer subsidies in February by rais-
ing official prices on most consumer items to their
black-market price. Since then, subsidies have
crept back into the official price structure. Mana-
gua has increased official staple prices only 75
percent, while average black-market prices have
risen by 400 percent. Moreover, under the new
super commissary system the number of state
stores-virtually the only legal outlets for consum-
er goods-was reduced from 100 to three, driving
more consumers to the black market.
Inflationary wage increases during the past two
years have moved the lower middle class and poor
onto the tax rolls and increased the tax burden on
others. The Finance Ministry in early July an-
nounced aplan to revise taxes that ostensibly
lowers rates across the board and only marginally
reduces total tax revenues. The new plan addresses25X1
the bracket creep for the middle and upper classes
by lowering their tax rates, but many others, even
with very low incomes, are paying taxes for the first
time.
Agricultural Mismanagement
Managua continues to claim that it seeks a mixed
economy, but its policies are driving independent
landowners out of business. Private-sector sources
estimate that since 1979 the Sandinistas have taken
about two-thirds of the arable land. In mid-June
Managua expropriated more than 3,600 hectares of
productive farmland in the heavily populated de-
partment of Masaya and immediately distributed
new land titles to peasant cooperatives, according
to US Embassy reporting. Although Managua
promised reimbursement, more than 1,200 hectares
of rich coffee and cotton lands belonging to the
president of Nicaragua's leading business associa-
tion were confiscated without compensation. In 25X1
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DI IEEW 85-033
/6 August /985
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Nicaragua: Economic Indicators
1980
10% 10%
0 1978 79 80 81 82 83 84 85
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early August, the government expropriated 90 pri-
vate farms to make room for an 11,800-hectare
dairy project. The Sandinistas claim to be respond-
ing to legitimate demands for land reform, but the
US Embassy reports that peasant demonstrations
clearly have been organized by the regime and
indicate that Managua may be preparing for fur-
ther land seizures.
US Embassy officials report recent Sandinista
heavy-handed commercial regulations will seriously
jeopardize Nicaragua's leading agricultural ex-
port-coffee. The government's purchasing author-
ity arbitrarily discounted the weight of coffee beans
by 20 percent to account for "water retention."
Producers are countering by soaking their beans in
water. At the same time, the state set a uniform
price for all beans, regardless of quality. As a
result, producers have even less incentive to bring
to market high-quality, properly dried coffee, and
the value of Nicaragua's coffee exports is almost
certain to decline from last year's level.
Only substantial increases in Soviet deliveries of
petroleum, machinery, and consumer goods have
averted the collapse of the Nicaraguan economy. In
the first quarter of this year, imports from the
USSR more than tripled over the same period in
1984, and the pace appears to be accelerating.
Several East European countries have
also supplied sizable amounts of foodstuffs and
consumer goods. In addition, Moscow is also meet-
ing almost all of Managua's petroleum require-
ments and continues to provide substantial supplies
of military equipment. Cuba has been providing
large quantities of items ranging from consumer
goods to industrial machinery.
Even though Moscow portrays the arrangements as
purely commercial, cash-short Managua will be
unable to make any substantial payments on its
debts to the Bloc countries, and the Soviets proba-
bly do not expect to be repaid anytime soon.
Nonetheless, Soviet deliveries next year probably
will stay at current levels and may even increase.
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Indonesia: Attacking ..Domestic
Inefficiencies
President Soeharto is continuing his dramatic over-
haul of Indonesia's inefficient economy in an effort
to promote development of an internationally com-
petitive manufacturing sector and reduce depen-
dence on oil earnings. His latest moves-streamlin-
ing operations of Indonesia's notoriously inefficient
ports and corrupt customs service-are aimed at "
slashing artificially inflated costs of imported mate-
rials for manufacturing industries. If these reforms
take hold, they almost certainly will help domestic
industries. We believe, however, Jakarta will even-
tually have to tackle reform of its tariff system to
avert serious foreign payments problems later in
the decade.
Indonesia traditionally has relied on petroleum and
primary commodities rather than manufactured
goods for its export earnings. Moreover, govern-
ment efforts to foster import-substituting industries
have led to an increasingly inefficient manufactur-
ing sector dependent on protective trade barriers.
Despite the sharp improvement in Indonesia's eco-
nomic performance in 1984, this highly protection-
' ist system has hobbled the international competi=
Indonesia: The Structure of Foreign
Trade, 1984
Percent
Exports
tiveness of its manufacturing sector.
The present protectionist. system includes tariffs on
imports, quantitative restrictions, local content reg-
ulations, outright bans on imports of certain goods
such as television sets,~and licensing of importers.
Bureaucratic ineptitude and corruption among
well-placed officials. have further increased the cost
of imports and, since about 90 percent of Indone-
sia's imports consist of raw materials and interme-
diate goods, have weakened the competitiveness of
export-oriented industries.
by a few trading companies; as a special example.
Although tariffs range only from 1 percent to 5
percent for most steel products, tight controls en-
able domestic producers to charge prices between
25 percent and 50 percent above world market
prices. Among other things, this practice precludes
the development of a competitive metal-fabricating
industry.
Artificially inflated costs are passed on to domestic
industries by importers who control sources of
supply. The World Bank has cited the impact of
restrictions on steel imports, which are controlled
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According to the US Embassy, subsistence farmers
and consumers are among those seriously hurt by
import controls. In a nation in which over 60
percent of the population is dependent on subsis-
tence agriculture, a 50-percent duty and tight
import controls have increased. the price of a simple
hoe to more than three times the world market
price. A ban on television imports has led to the
development of a television and electronics industry
whose products cost 20 percent to 50 percent more
than in international markets.
Targeting the Bureaucracy
Soeharto has not yet opted for_ wholesale disman-
tling of tariffs and quotas, but in a move as far-
reaching as the austerity and reform measures '
undertaken in 1983, Soeharto last April ordered a
cleanup of Indonesia's ports and customs service.
Long reputed to be the most corrupt element in the
bureaucracy, the Customs Service has created a
serious drag on the growth of the manufacturing
sector. For example, an Indonesian businessman
told US Embassy officials that 19 percent of
shipping costs for rubber exports and up to 45
percent of port-clearing charges for machinery
imports were "grease money" under the old system.
To reduce this burden on the economy, Soeharto
has summarily relieved the Customs Service of
most of its inspection functions and hired a Swiss
firm to examine Indonesia's exports and imports.
The government has placed about half of the
13,000 Customs employees on an indefinite fur-
lough, which some observers believe is a predismis-
sal leave. Soeharto has also suspended the previous-
ly required inspection. of export shipments except
for suspected contraband, taxable items, and cer-
tain other small shipments:, The collection of import
duties has beenturned over to the foreign exchange
banks. Harbor costs are to be reduced 50 percent
' In 1983, Soeharto devalued the rupiah by 28 percent, drastically
cut fuel and food subsidies, imposed budget austerity, and intro-
duced major reforms in the banking sector designed to promote
domestic saving and investment and tax reforms aimed at reducing
Other Reform Measures
Jakarta is also proceeding with its program to
streamline investment procedures. Potential inves-
tors have long complained of bureaucratic obsta-
cles, duplicate and unnecessary paperwork, and
excessive redtape. In the past year, Jakarta has
eliminated a number olprocedures and simplified
others.. In some cases, investors may apply directly
for a final investment approval and avoid the
previously required temporary approval, and they
no longer have to supply invoices of the exact
amount and value of machinery to be imported for
a project. According to the US Embassy, Invest-
ment Board Chairman Ginandjar Kartasasmita
recently said lurther changes are planned: new
patent laws are being dr~'ted; divestiture require-
ments,for,foreign investors are being reconsidered,
and prohibitions on foreign participation in export
projects will be eased.
through the rationalization of fees and the elimina-
tion of import monopolies.
To ensure compliance with his order, Soeharto
assigned Armed Forces Commander and Intelli-
gence Chief Mlirdani .to oversee port security-a
veiled threat to opponents of the reforms that he
would not tolerate opposition. Within a week of
Soeharto's April decree, a package of 33 directives
from the various ministries spelled out the new
procedures and. set time limits of three to seven
weeks for implementing the system.
The reforms initially gained a favorable response
from shippers and manufacturers. The new regula-
tions have cut port costs, slashed redtape, and
reduced opportunities for illegal. levies, by customs
officials: In the major. Sumatran port of Belawan;
for example, importers can now obtain their ship-
ments with one signature, instead of the 36 previ-
ously required. Goods are clearing port more quick-
ly,-and turnaround time for oceangoing ships has
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been cut in half at an average saving of about
$15,000 per day. Jakarta hopes that extreme cases,
such as the instance revealed by an investigation of
port operations in Surabaya in which goods had
been held for 11 years, will be eliminated.
Prospects
Soeharto's efforts to eliminate unnecessary regula-
tions and reduce corruption almost certainly will
help improve the competitiveness of domestic in-
dustry, but will require long-term presidential at-
tention to produce lasting results. In the past, the
government has made little more than cosmetic
attempts to eliminate corruption. Soeharto is pur-
suing the current policies to make. up for the
expected impact of declining oil prices on Indone-
sia's earnings and will remain under stiff financial
pressure to eliminate inefficiencies and obstacles to
competitiveness for the next few years.
While the measures undertaken so far are drastic
by Indonesian standards, we believe further dra-
matic gains in cost reduction will be hard to
achieve. Several key influence groups supporting
Soeharto have benefited from the system and will
resist efforts to undercut their favored position. In
addition, there is a problem of corruption at the
highest levels of overnment.
he brand new
Sukarno-Hatta Airport in Jakarta, for example, is
widely known among Indonesians as a financial
fiefdom of the Soeharto family.
Jakarta will have ..even more serious. structural
problems later in the decade if it leaves its protec-
tionist foreign trade regime in place-a develop-
ment that will intensify foreign payments problems.
In the near term at least, the economy will remain
heavily dependent on oil, a situation that will
demand improvement in the competitiveness of
nonoil sectors. By continuing to impose high costs
on domestic manufacturing through tariffs on capi-
tal goods, however, Jakarta ensures that investment
will continue to be diverted to inefficient enter-
prises serving the domestic market. This precludes
a substantial investment in labor-intensive firms
that might fuel more rapid nonoil export growth in
the future. Unless and until Jakarta tackles the
problem of tariff reform, we expect this investment
pattern to continue to slow the growth of employ-
ment in manufacturing, and damage export com-
petitiveness.
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Countries Producing Tropical Timber
Country producing tropical timber whose timber resources are highly depleted
Country producing tropical timber whose timber resources have capacity for expanded exploitation
Hones dt3'ras Ivory
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Tropical Timber:
Intense Competition for
a Declining Resource
Intense competition among the leading timber ex-
porters-Malaysia,~Indonesia, and the Philip-
pines=has created a depressed market for tropical
wood characterized by restrictive trade practices,
smuggling, and rapid resource depletion. Despite
the current glut, the leading importers-Japan, the
United States, and Western Europe-are likely to
face serious tropical timber shortages and higher
prices in the late 1980s or early 1990s. This price
reversal could lead to greater substitution of do-
mestically produced temperate hardwoods for
tropical products as well as increased demand for
US wood products in the lucrative Japanese mar-
ket. In addition to pressures from- the United
States; Japan-the largest market for wood-faces
increasing demands from Southeast Asian export-
ers for greater market access.
Tropical Timber Agreement
The First International Tropical Timber Agree-
ment entered intoJorce 1 April 1985 following
eight years of negotiations as part c~/' UNCTAD's
Integrated Commodities Program. Unlike agree-
ments on co,,(gee, sugar, tin, and rubber, the pact
contains no provisions for controlling market sup-
plies or stabilizing prices. Its objective is to provide
a frameworklor cooperation between producing
and consuming countries to promote expansion and
diversification c2/'trade in tropical timber. Only
cc~"ee and sugar among the nonoil commodities
-generate greater export earnings,Jor LDCs than
timber. The new agreement is unique in that it is
thefirst pact to link trade with national policies
aimed at conservation of resources.
A Turbulent Tropical Timber Market
Malaysia, Indonesia, and the Philippines, which
together account for about three-fourths of trade in
tropical hardwoods, have become concerned about
the viability of their timber industries. The big
three producers have adopted policy measures-
higher export tariffs and quotas, outright bans on
log exports, and predatory pricing for wood prod-
ucts-that are reshaping trade patterns and spur-
ring fratricidal competition. Moreover, the move-
ment toward increased processing of logs into
plywood and other wood products has created new
tensions among the Southeast Asian producers. As
a result of this intense competition in relatively
weak markets, prices for logs, sawnwood, and
plywood have fallen 25 to 35 percent from their
peak levels in early 1980.
The Big Three Exporters-A Closer Look
East Malaysian states of Sabah and Sarawak and a
major source of foreign exchange for Kuala Lum-
pur, $1.5 billion in 1984-10 percent of total export
earnings.
While the national forest-products sector is now
experiencing a downturn due to soft demand and
weak prices, there is growing concern over deple-
tion of its timber resources. According to Kuala
Lumpur, Peninsular Malaysia and Sabah could run
out of commercial tropical forests by the end of the
century or sooner. Peninsular Malaysia's forests are
also under heavy pressure from slash and burn
farming as well as large agricultural development
schemes.
Private-sector reforestation has been minimal be-
cause the cost is viewed as prohibitive given the
long time span=50 to .70 years-required to pro-
duce amarketable stand. Kuala Lumpur is pushing
Malaysia is the world's largest producer and ex-
porter of tropical hardwood logs and lumber. Forest
products are the mainstay of the economies of the
Secret
DI lEEW 85-033
/6 August 1985
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Selected Tropical Hardwood Prices,
1970-85a
I~~~~I
0 1970 75
u Average yearly price.
b January-June.
Logs
Sawnwood
~~I~~~~I
80 85 b
reforestation programs, including the planting of
new fast-growing softwood species, coupled with a
reduction in logging rates to reverse what appears
to be an inevitable decline in national output that is
expected in the 1990s. The federal and state gov-
ernments are also taking steps to encourage greater
domestic processing of raw timber through log
export quotas and bans and differential export
taxes on logs versus products. Peninsular Malaysia
banned all exports of tropical hardwood logs as of 1
January 1985.
Indonesia, possessing the world's greatest remain-
ing supply of commercial tropical hardwoods; has .
become the world's largest .single exporter of tropi-
cal hardwood plywood. Tropical wood exports
earned an estimated $1.1 billion in -1984, ranking
only behind petroleum and natural gas exports. Of
aggregate forest product exports, plywood account-
ed for 60 percent of total 1984 earnings or $667
million, more than double the level achieved in
1982.
Jakarta's forestry policy seeks to substantially in-
crease the value added of wood exports. In 1980,
Jakarta began a policy of phasing down log exports,
totally halting their export beginning this year.
This policy has been tied to heavy investments in
the processing sector estimated at over $2 billion
over the last few years: Earlier this year, 10 new
plywood plants were opened bringing to 96 the
number of plants with a combined capacity of 4.7
million cubic meters annually. An additional~27
plants are now reportedly under construction: Cur-
rent depressed demand for wood products and lack
of access to the Japanese market, however, has
forced some recent plant shutdowns. Moreover;. in
order to defend export prices, the government in
May suspended export licenses of some plywood
mills .for undercutting fixed prices on sales to the
The Philippines ranks as the world's third-largest
producer and exporter of tropical hardwoods. In-
creasing resource depletion, escalating costs; and
heightened competition, however, have caused ex-
port earnings from wood products to dip :to only 5
percent of total export earnings in 1984, from~a
peak of 25 percent in the late 1960s.
The disappearance of the Philippine tropical forest
resource base is particularly acute. According to a
recent University of the Philippines study, mature
tropical forest stands will be completely depleted
before the year 2000, even if the rate of harvest
declines. The study concludes, however, tliat if the
annual timber drain continues at the rate'of the .
past decade, tropical timber supplies from old
growth forests could be exhausted as early as 1988.
Manila's campaign against log smuggling appears
to be fizzling out, according to US Embassy report-
ing. The heavy hand of the military is widely
viewed to be a major problem for the industry.
Military and Ministry of Defense officials owrr or
control several lumber companies and use their
power to the disadvantage of competitive private-
sector firms. Legal operators are being -forced to
pay bribes to the Philippine Army and/or the New
People's Army, and the smuggling of tropical logs
overseas is rampant. According to press reports, an
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Major Southeast Asian Tropical Million Cubic Meters
Hardwood Producers: Exports of
Selected Hardwood Products, 1975-85
1977 ~
16.12
2.99
0.34
1978
16.72
2.83
0.41
1979
16.50
3.54
0.47
1980
15.15
3.32
0.47
1981
15.87
2.81
0.47
1982
19.30
3.14
0.40
1983
18.81
3.49
0.48
1984
16.67
2.77
0.37
1985 a
15.50
3.00
0.30
Indonesia
197$
12.88
0.40
NEGL
1976
18.11
0.66
NEGL
1977
18.93
0.59
NEGL
1978
19.46
0.76
0.01
1979
18.16
1.28
0.12
1980
15.18
1.21
0.25
1981
6.49
1.18
0.76
1982
3.22
1.24
1.23
1983
2.96
1.86
2.18
1984
1.73
1.45
3.02
1985 a
0
2.00
3.40
Philippines
1975
4.60
0.25
0.16
1976
2.33
0.49
0.26
1977
2.05
0.46
0.34
1978
2.20
0.57
0.38
1979
1.25
0.92
0.42
1980
1.15
0.74
0.37
1981
1.68
0.55
0.40
1982
1.59
0.59
0.25
1983
1.02
0.73
0.30
1984
0.85
0.54
0.27
1985 a
0.37
0.35 .
0.18
estimated $800 million worth of tropical logs were
smuggled out in recent years, perhaps one-half the
total to Japan. Advocates of a total log export ban
believe it to be the only effective measure by which
smuggling can be checked. Currently, the main
policies to control log exports and encourage pro-
cessing are differential export taxes on tropical logs
and plywood. Tight credit and high interest rates
have also discouraged much-needed investment.
The Philippine Wood Producers Association has
petitioned the government to place an additional
10-percent export tax on wood products earmarked
Tokyo's restrictive import policies-Japan accounts
for roughly one-half of world tropical timber im-
ports-are a major irritant to timber exporters.
Malaysia, which continues to be the dominant
supplier of tropical hardwood lumber to Japan, has
also become Japan's largest tropical log supplier
capturing 80 percent of the market. While there
has been some growth in tropical hardwood ply-
wood imports, the market is effectively blocked by
Japan's high protective tariff. Southeast Asian
countries, particularly Indonesia, are vigorously
pressuring Tokyo to lower its duties on wood
paneling-a symbolic issue in LDC complaints that
Japan favors the United States and other Western
countries.
Tokyo has promised to start a phasedown in its
plywood tariff schedule beginning in 1987 as part
of an as-yet-undefined restructuring of its domestic
wood industry. While the prospect of greater mar-
ket access is welcome news to US and Asian
plywood exporters alike, Indonesia feels that this
action will not be sufficient according to the US
Embassy. With much of the plywood sector report-
edly on the verge of bankruptcy, Jakarta believes
that immediate access to the Japanese market is
essential, and its wood paneling industry is consid-
ering placing a $20-per-cubic-meter subsidy on
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Alternate Suppliers-Problems and Prospects
African countries for several years have supplied
about 13 percent of the global volume of tropical
hardwood trade with the Ivory Coast, Gabon,
Cameroon, Liberia, and Congo the most important
current exporters. Nigeria and Ghana, like Thai-
land, have been reduced to minor exporters in the
last 20 years because of resource depletion. The
Ivory Coast, which now supplies about one-half of
African tropical log exports, is also confronted by
decreasing production capacity due to resource
depletion and lack of investment in the sector. In
other countries, development of tropical timber
exports still is handicapped by shortages in river,
rail, and road irtlrastructure that add substantial-
ly to extraction costs. Another problem is that the
greater diversity of African forests sometimes pre-
vents local manufacturers from finding in any one
species su~"icient quantities to regularly supply
importers over an extended period. As a result,
only a handful of fairly abundant species dominate
trade.
Latin America's export.flow only accounts for
around 4 percent of current world trade, with
Brazil being the only significant exporter. While
the Brazilian Amazon accounts for 25 to 35 per-
cent of the world's remaining stocks of tropical
.forests, their heightened exploitation presents sig-
nificant economic and technical problems. While
timber volume is immense-an estimated 260 mil-
lion hectares in the Amazon Basin-tropical forest
species composition is highly complex-even more
so than in Africa. The result is that only a few
commercially viable trees are potentially harvest-
ableper hectare. In addition, extraction costs are
further increased since much of the logging must
be done manually in swampy seasonally.flooded
areas. Despite these constraints, Brasilia's goal is
to make the country into the world s leading
tropical timber exporter in the next 10 years.
exports to the Japanese market. If enacted, Tokyo
is likely to charge Indonesia with dumping to
protect its large, politically powerful wood process-
ing industry.
Outlook and Implications
In the immediate future, importers should continue
to benefit from soft prices. By the late 1980s or
early 1990s, however, with the depletion of high-
grade tropical hardwoods in key parts of Southeast
Asia and West Africa, prices are likely to turn up
sharply. This probably will spur logging in remote
parts of Africa and the Amazon Basin, but costs of
production are expected to be substantially higher
than in more accessible traditional producing areas.
Higher prices for tropical hardwoods are also ex-
pected to encourage major importers to substitute
local woods-such as US temperate hardwoods,
nonwood products, or other imported woods.
In the huge Japanese wood import market, where
growth in the use of domestic woods is not an
important factor, increased prices, coupled with
reduced availability of tropical logs for processing,
could spur greater imports of substitute US tem-
perate hardwoods as well as encourage the Japa-
nese to find expanded uses for US softwood prod-
ucts. For both the United States and Southeast
Asia, however, the level of access to Japan's wood
paneling market will turn both on the tariff issue
and on the tougher question of nontariff barriers
such as standards and certification. The United
States now faces a 15-percent tariff on plywood
entering the Japanese market-the tariff on tropi-
cal hardwood plywood is around 19 percent. The
long-sought-after tariff reduction plan for wood
paneling recently announced by Tokyo as part of its
Action Program for Improved Market Access could
help to lift US solid wood exports; Japan is already
the largest market for US forest products with sales
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Secret
of $1 billion annually. Reduction in Japanese tar-
iffs, if accompanied by an easing of nontariff
barriers, could also lead to increased exports from
the United States and for tropical countries such as
Indonesia, which have pinned much of their forest-
sector export goals on increased access for value-
. added forest products.
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Gulf Cooperation Council:
Economic Integration Efforts
The Gulf Cooperation Council (GCC),' which is
embarking on its fifth year, has made progress
toward its principal goal of increased cooperation
among the member states. Although recent atten-
tion has focused on security coordination, most of
the initiatives implemented to date have been in the
economic sphere. The GCC has set the framework
for economic and commercial ties, taken steps to
link the infrastructures of the member states, and
begun testing its powers as an international eco-
nomic entity. Depressed oil revenues have, however,
complicated the Council's already difficult task of
implementing its ambitious aims. The GCC's ef-
forts may have reached a plateau, because the
relatively easy steps have been taken and those
remaining will be harder to tackle; full economic
unification is unlikely.
Agreement and Implementation
GCC members signed the Unified Economic
Agreement in June 1981, which outlined broad
goals for economic integration of the member
states. These included: technical, financial, and
monetary cooperation; the coordination of commer-
cial and development policies, transport, and com-
munication; and free movement of citizens and
capital.
The first institution created by the GCC was the
Gulf Investment Corporation (GIC). It was to be
capitalized at $2.1 billion-paid-in capital totals
only $420 million-with equal contributions by
member states, and used to finance projects both
within and outside the Gulf. Aprofit-oriented
company, the GIC talks about investment in the
GCC countries, but it has not invested in any GCC
project. Rather, it has spread its investments
abroad, acquiring equity interests in foreign com-
panies with links to GCC states. In fact, allocating
projects among the members has been difficult
' The GCC comprises Saudi Arabia, Kuwait, Bahrain, Qatar,
United Arab Emirates, and Oman.
The Integration Concept
The GCC, created in May 1981, provided a multi-
lateral institution based on already existing bi-
lateral cooperation. In addition, it created alorum
for the states to address their common interests
and problems-all six are conservative govern-
ments with close ties to the West, whose societies
are undergoing rapid changes financed by oil reve-
nues, and who are concerned about protection
against their more powerful neighbors.
The ultimate objective of the GCC was GuUArab
unity, but the impetus for its creation was the
outbreak oj"the Iran-Iraq war. Cooperation o,/jrered
the regimes the best hope jor survival in the,face of
threats to their security, particularly from Iran.
Once the idea of regional cooperation was agreed
upon, Gu(f leaders saw advantages in economic
cooperation because of their small populations and
limited range of goods.?
? Economies of scale might permit the develop-
ment ojcapital-intensive import substitution or
export promotion projects. Products intended
chiefly for domestic use would have a larger and
more stable market, and large export projects
could be financed.
? The elimination of custom tarijJs would allow
for freer movement of goods among the members.
? United action might make it possiblefor the GuU
states to obtain better terms from their trading
partners.
? A regionwide program for developing ir~frastruc-
ture could increase efficiency and diversUy the
sources of income.
Secret
DI /EEW 85-033
l6 August 1985
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because each state demands, for example, its own
airline, steel mill, or cement factory.
In March 1983, a provision allowing GCC citizens
to provide professional services, seek employment,
and invest in other member states took effect.
Commerce, real estate, and financial services-the
major nonoil economic activities in these coun-
tries-are not covered, however. Investment by
nonnationals is restricted to 25 percent of equity.
The first step toward a common external tariff
policy was implemented in September 1983. The
minimum tariff rate was set at 4 percent, although
each state was allowed to draw up a list of food-
stuffs and essential commodities that could enter
duty free-48 percent of Saudi import categories,
for example, are exempt from tariffs. Higher rates
can be charged on some goods to protect local
industries. Goods manufactured in a member state
are exempt from tariffs if they meet agreed-upon
criteria.
During 1984 the GCC implemented a series of
policies designed to eliminate barriers to the free
movement between member states of all factors of
production. It issued unified passports to citizens of
member states. Members of a variety of professions
were permitted to practice in any of the GCC
states. Real estate, if used for the residence of a
GCC national, could be owned, with certain re-
strictions, in other member states. The Gulf Stan-
dards Organization was established, essentially re-
placing the Saudi Arabian Standards Organiza-
tion. Joint procurement of pharmaceuticals,
computers, veterinary medicines, and other com-
modities got under way. In addition, the corner-
stone of the Arabian Gulf University-an institu-
tion open to students from all GCC countries-was
laid in Bahrain.
The Greater Goals: Pipedreams?
Having successfully concluded several projects, in-
cluding setting up its organizational framework,
the GCC has begun to consider more grandiose
undertakings. Among these are a GCC crude oil
pipeline that would bypass the Strait of Hormuz,
spective.
an integrated gas distribution system, and a strate-
gic petroleum reserve. Several large industrial proj-
ects and an electrical grid are also under discussion.
Unified economic policies, such as monetary coop-
eration, development of a common currency, and
harmonization of internal fuel prices are being
considered. They have also met to discuss manpow-
er problems in the Gulf and ways to control the
flow of expatriate labor, as well as food, agricultur-
al, and educational policies from a regional per-
Many of the large infrastructure projects are too
capital-intensive or complex to be implemented
during a period of regional economic austerity.
Member countries would find it difficult to justify
large outlays for GCC projects at a time of domes-
tic budget cutbacks, particularly if other members
are perceived to be reaping the benefits. Moreover,
goals such as monetary cooperation and a common
currency require relinquishing control over eco-
nomic policy, something the leaders are reluctant to
Changing conditions have rendered some GCC
projects unnecessary. The gas grid project has been
tabled because Kuwait has shifted to oil in previ-
ously gas-fed units, while Saudi Arabia has
brought on nonassociated gas at a pace to satisfy all
of its demand. Attacks on tankers in the Persian
Gulf, which served as an impetus for the pipeline to
bypass the Strait of Hormuz, has not disrupted oil
shipments.
Prospects for Economic Integration
It is unlikely that the GCC will develop into a true
economic unity, even if the oil market firms up.
Although the member states have unified many
aspects of their bureaucracies, trade, and com-
merce, they still act cautiously and agree only to
those initiatives that directly serve their interests.
Converting broad goals into specific policies is
difficult, and the task is complicated further be-
cause the Council's decisions must be ratified by all
six heads of state. Moreover, there are so many
loopholes and exceptions even in those policies-
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Gulf Cooperation Council: Economic
Indicators, 1984
Saudi Arabia
Kuwait
? Qatar
Bahrain
United Arab Emirates
Per Capita Gross Domestic
Product ?
Thousand US $
Gross Domestic Product'
Billion US $
Trade Balance
Billion US $
especially regarding trade and commerce-that the
policies often seem arbitrary and ineffective.
Moreover, the smaller states are wary of Saudi 25X1
ambitions, and their suspicions are likely to frus-
trate attempts at industrial, monetary, and develop-
mental integration. These states look to the Saudis
to provide leadership on political issues demanding
Arab consensus, international economic issues, and
defense. Still, they are worried about the potential
for Saudi hegemony. The soft oil market and the
dependence of each country on oil-based production
also puts them in competition with one another.
Considering the discounting and cheating on pro-
duction quotas that the GCC OPEC members
already engage in, harmonization of prices or pro-
duction among GCC members would appear to be
all but impossible.
The Council has yet to grapple with the implica-
tions of continuing disparities in investment oppor-
tunities-stemming partly from tax and financing
concessions and subsidies offered by the member
.states-or in income distribution. Nonetheless, the
GCC has taken significant steps and is pleased with
its progress to date. It has institutionalized the
relationships of the six states, vastly improved
regional communications, and encouraged closer
cooperation. Although economic integration is still
in the evolutionary stage, members are beginning to
see themselves as a regional entity.
Implications for the United States
Oil Export Revenues?
Billion US $
0
+~ Estimated.
Foreign Exchange Reserves
Billion US $
The increasing convergence of views of the GCC
states will require the United States to approach
the GCC collectively on many issues. The GCC has
approached the United States to propose explor-
atory trade discussions. The Council wants to dis-
cuss greater access to US markets for their petro-
chemical exports, joint ventures that would transfer
technology, and liberalization of trade, perhaps
leading to a free trade zone with the United States.25X1
A GCC official recently-cited relatively high US
and EC tariffs, as well as the establishment of a
US-Israeli free trade lone last year, as reasons for
a similar trade arrangement.) 25X1
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Secret
Energy
OPEC Production OPEC crude oil output in July averaged 14.7 million b/d, a slight increase
Update from June levels. Oil market expectations of a possible cut in OPEC's official
prices at its two July meetings kept production 1.3 million b/d below the
organization's self-imposed ceiling. Saudi Arabia reportedly increased produc-
tion to replenish floating stocks strategically located near major marketplaces.
Higher Saudi output was offset by reduced production in Iran and Nigeria,
both of which are looking to market their oil more aggressively.
OPEC: Crude Oil Production, 1985
a Neutral Zone has no production quota; output is divided between
Saudi Arabia and Kuwait and included in their country quotas.
Secret
DI IEEW 85-033
16 August 1985
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Reduced Oil Aid A source of the US Embassy in Kuwait reports that Neutral Zone oil sold on
to Iraq behalf of Iraq will be reduced from 248,000 b/d to 84,000-124,000 b/d. The
Arabian Oil Company (AOC), which produces the oil and handles the aid
payments for Saudi Arabia and Kuwait, had complained that the arrangement
was causing them to lose money, and they would stop production unless given
relief. AOC's contract calls for it to remit the cash equivalent of 248,000 b/d
at official prices to Iraq. The slack market for heavy crude, however, has
recently lowered AOC's sales to about 200,000 b/d, forcing them to make up
the difference. The reduced flow of aid will cost Iraq at least $580 million over
the next six months. This comes at a particularly bad time for Baghdad as it
struggles to maintain finances through late this year when it starts receiving
oil revenues from its new pipeline through Saudi Arabia.
Syrian Oil Syria's oil agreement with Iran for 1985/86 was recently approved by Iran's
Developments Consultative Assembly. The agreement again calls for Iran to provide Syria
with 7.4 million barrels of free oil and up to 37 million barrels of oil at a $2.50
per barrel discount. The free oil plus the discount provides about $300 million
in aid to Syria. Unlike the previous two contract years, Iran did not forgive or
reschedule Syrian oil debts and the Assembly stated that all bills must be paid
by 2 October 1985. Domestically, Syria has increased production from its new
Thayyem oilfield in eastern Syria from 5,000 b/d to 12,000 b/d. The oil is be-
ing pumped through an unused gas pipeline to the Iraq-Syria pipeline and then
on to the Homs refinery. Production at the field is now at the limit of the in-
stalled gas separation facilities at Thayyem.
Algerian-Yugoslavian Algiers and Belgrade signed an agreement on 30 July calling for the delivery
Natural Gas Contract of 20 billion cubic meters (bcm) of Algerian gas over 20 years beginning in
1988. Yugoslavia may have been attracted to the deal by the Algerian offer to
help construct pipeline facilities at Arzew. Yugoslavia currently consumes
about 6 bcm of gas annually-about 10 percent of its total energy require-
ments-with 3.7 bcm imported from the Soviet Union. The gas price is as yet
unknown, but is expected to be equal to the price Italy pays for Algerian gas-
about $3.50 per million Btu-with a discount for the higher transport cost.
Delivery will require the connection at Genoa of the pipeline linking Algeria
and Italy to the Yugoslav gas network. This agreement, together with the
recent Algerian=Brazilian gas contract, marks a significant geographic expan-
sion in Algerian gas marketing efforts. It also suggests Belgrade's willingness
to diversify its sources of gas imports.
Support for Peru's President Garcia is likely to receive considerable tacit support from Latin
Ceiling on Interest American leaders for limiting debt repayments to 10 percent of export
Payments earnings over the next 12 months, but the support is unlikely to produce an
overt bandwagon effect any time soon. Brazil's Foreign Minister Setubal
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commended Peru for being the first Latin country to link trade and debt
payments.
Press reports indicate that Uruguay is studying a similar ceiling set at 20
percent of export earnings. In contrast, Argentine Foreign Minister Caputo
has told US Embassy officials that Buenos Aires is displeased by Garcia's
announcement because it weakens Alfonsin's standing at home and will create
new political pressures for Alfonsin to adopt a hard line.
~Garcia's declaration generally is viewed as a radical
action and, with several loans and'reschedulings for Latin America now
pending, he is unlikely to obtain broad regional endorsement. Some countries,
however, may join Brazil in issuing sympathetic statements to intensify
pressure on creditors for financial concessions. His proposal, however, could
provide a rallying point for the region's debtors,in the future, particularly if in-
dustrial countries enact new protectionist legislation.
Costa Rican Preelection politicking is complicating Costa Rica's delicately balanced finan-
Financial cial stabilization program-the most successful in Central America-and
Program in Trouble probably will slow economic growth for the rest of the year. The US Embassy
reports that San Jose failed the IMF's standby loan review last month, largely
because opposition politicians have blocked approval of a World Bank loan.
The action caused a $10 million drawing from the IMF to be suspended and a
$40 million World Bank disbursement to be delayed. Moreover, nearly $60
million promised from commercial banks as part of the stabilization program
are being held up. As a result, Costa Rican foreign reserves have plummeted,
and creditors have been informed that they will have to wait longer for past-
due interest payments. President Monge may be forced to strike a deal that
gives opposition leaders much of what they want. Getting back into the good
graces of the IMF and remaining :iri compliance for the rest of the year,
however, will require tough measures to restrain government spending and to
reduce imports and consumption further. The economy-which had rebounded
by 6 percent in 1984-began to slow during the first half of this year. A major
drop in banana production was chief among export problems. Economic
growth for 1985 probably will be only 2 to 3 percent-not enough to increase
real consumption levels.
Nigeria's Mounting A major international bank's decision to reduce trade credits to Nigeria by
Financial Woes over one-third could trigger similar action by other banks and leave Lagos
vulnerable to a short-term credit crisis
The US Embassy reports that local bankers are concerned that
repayment delays on trade credits could prompt further cutoffs by foreign
lenders. The country's already fragile cash-flow position had been weakened
by a recent one-third decline in oil exports. The prospect of a significant
reduction in trade credits may encourage Head of State Buhari to reach an
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agreement with the IMF, which would provide access to about $3 billion in
IMF and World Bank funds. The US Embassy reports Buhari took a more
flexible stand toward the IMF in a recent radio interview. His weak political
position, however, probably will make it difficult to implement risky IMF-
sponsored reforms that could provoke serious public unrest.
Guinea Prepares The Guinean Government is taking steps to implement economic reforms
for IMF Agreement under an IMF standby agreement. Conakry recently signed a protocol to
establish an affiliate of a French bank in Guinea that will serve as the
country's primary commercial credit institution. Guinea also has initiated a
census of government workers as the first step toward reducing civil service
and parastatal:payrolls. These moves will facilitate final IMF standby
negotiations set for October.
OECD Nuclear Power A potential delay has been avoided for the implementation of the interest rate.
Plant Financing provisions for the August 1984 OECD Nuclear Power Plant Financing
Agreement Understanding, according to US officials. The new interest rate requirements
were to go into effect 10 August 1985. Difficulties center upon how to
establish minimum interest rates, known as special commercial interest
reference rates (SCIRRs), for low currencies such as the yen. The EC, Canada,
and the United States suggested a minimum interim flat rate of 8.1 percent,
0.5 percentage points above Tokyo's proposed SCIRR rate. Last month, a
MITI official requested either US approval of Tokyo's proposal or delayed
implementation of the interest rate requirements. Washington, however,
maintained that waiting for overall agreement on SCIRRs would give other
participants an excuse for failing to apply the provisions of the Understanding.
As a result of US efforts, Japan agreed last week to an interim rate of 7.8 per-
cent until the end of September. The yen SCIRR proposal will be discussed at
the OECD Export Credit Group meeting in September. Although no major
nuclear power plant contracts have been awarded since the Understanding was
enacted, competition is especially keen for China's planned $5-6 billion
investment in nuclear power over the next five years.
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Global and .Regional Developments
Movement on In a surprising move, New Delhi has shifted its position on the longstanding ~
Himalayan water-sharing issue between India and Bangladesh 25X1
Water Sharing DIndia's new position is a positive first step toward an integrated 25X1
..approach-long advocated by Bangladesh-to solving the water control
problems of the Himalayan Basin: India is prepared to approach Kathmandu
- about constructing reservoirs in Nepal to store runoff from the Himalayas in
order to.augment the Ganges during. the critical dry season. In the meantime,
New Delhi reportedly has decided to extend the 1982 water-sharing agreement
with Dhaka for another three years. Financial, technological, and political
constraints, however, will make negotiations toward a tripartite agreement on
water sharing difficult. 25X1
Himalayan Drainage Basin
Q Drainage basin
~_ Canal
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Nepal:
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ch~ l
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