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February 21, 1986
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Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP97-007708000100110001-0 Intelligence 25X1 Directorate of Weekly International Economic & Energy DI IEEW 86-008 11 February 1986 v 687 Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP97-007708000100110001-0 Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP97-007708000100110001-0 Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP97-007708000100110001-0 I Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP97-007708000100110001-0 Secret International Economic & Energy Weekly 21 February 1986 iii Synopsis 1 Perspective-Latin America: Potential Fallout From Mexico's Financial Problems ALA 3 Italy: Worsening Budget Deficit EURA EURA 11 Jordan: Keeping Its Head Above Water~~ 25X1 NESA ~ 1JX1 15 Poland: The Status of Foreign-Owned Firms~~ 25X1 EURA I I 25X1 25X1 25X1 25X1 25X1 25X1 25X1 19 Key LDC Debtors: Limited Progress on Tax Reform oc/ ~a 25X1 ~ 25X1 Energy International Finance International Trade Global and Regional Developments National Developments Comments and queries regarding this publication are welcome. They may be directed to Directorate o,1' Intelligence Secret D/ IEEW 86-008 11 February 1986 Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP97-007708000100110001-0 Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP97-007708000100110001-0 Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP97-007708000100110001-0 Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP97-007708000100110001-0 International Economic & Energy Weekly~~ 25X1 Synopsis 1 Perspective-Latin America: Potential Fallout From Mexico's Financial Problems Mexico's handling of its growing financial difficulties runs the risk of sparking action on the part of other Latin American debtors. ~~ 25X1 Italy's continuing huge public-sector deficit, which is likely to top 16 percent of GDP in 1986, is placing strains on the economy and the five-party ruling co- alition. In any event, economic growth is likely to slow this year, making early elections some time this summer a likely possibility. 7 EC Institutional Reforms Make Slow Progress EC efforts to remove barriers to intra-EC trade and facilitate decisionmaking following the entry of Spain and Portugal have been delayed by the Danish Parliament's rejection of reforms adopted at the EC summit meeting in Luxembourg last December. Once the Danish objections are resolved, these reforms could be an important step in addressing the problems in EC trade and competitiveness. 11 Jordan: Keeping Its Head Above Water Jordan's abrupt economic slowdown-and the realization that renewed rapid growth is unlikely-has prompted the government to take a more serious look at its economic strategy. Rising unemployment and uncertainty about the levels of foreign aid and worker remittances are among Amman's greatest concerns. 15 Poland: The Status of Foreign-Owned Firms Over the past several years, Warsaw has promoted the establishment of Western-owned companies in Poland-so-called Polonia firms-as a way to increase market supplies and generate hard currency earnings. Nonetheless, tighter regulation has dealt a setback to government efforts to attract large- scale Western investment. Secret D/ /EEW 86-008 21 February 1986 ~ Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP97-007708000100110001-0 I: I I I I ! _. Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP97-007708000100110001-0 19 Key LDC Debtors: Limited Progress on Tax Reform Large government budget deficits are impeding needed tax reforms in the 15 countries targeted by the Baker initiative. Although a major concern is that tax reform can reduce government revenues and worsen the deficit problem, these efforts are also being stalled by substantial political opposition. 25X1 Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP97-007708000100110001-0 i Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP97-007708000100110001-0 International Economic & Energy Weekly ~~ 25X1 21 February 1986 Perspective Latin America: Potential Fallout From Mexico's Financial Problems ~ 25X1 At the request of the presidents of Mexico and Venezuela, the 11 Cartagena Group countries have scheduled an emergency meeting of finance and foreign ministers in Uruguay on 27-28 February to discuss the current Mexican crisis and measures to deal with it. Following a preparatory session on 10 February, Uruguay's Foreign Minister Iglesias told the press that the Cartagena countries will focus on the new problems created by falling oil prices. Although the other Latin debtors are being publicly circumspect about Mexico's financial plight, we believe that at the very least Mexico will draw moral support from other Latin American countries in negotiations for interest rate concessions and new funds. Although we judge few other Latin govern- ments would automatically demand the same terms should foreign banks grant the de la Madrid government interest payment relief, all debtors clearly would view the development as an irreversible change in the debt servicing ground The debt policies of Latin American governments are also being driven by each individual country's financial self-interests. These, in turn, depend on the country's balance-of-payments position and the status of its relations with foreign creditors. Nevertheless, the same deflationary pressures that are plaguing Mexico are also affecting other Latin American debtors such as Venezuela and Chile. These pressures coupled with the recent precedence for unilateral action set by Peru and Nigeria could increase the chances for other countries taking steps on their own. The financial crisis presently is concentrated in Mexico, but we believe it could again engulf the region. We are particularly concerned about the consequences if Mexico's financial predicament again causes creditors to "cut and run" by reducing trade credits, withdrawing interbank deposits, and suspending dis- bursements of medium-term credits to the region's other debtors. In that event cash-flow problems will ensue throughout the region. Such actions would almost certainly play into the hands of populists throughout Latin America who believe that the current debt strategy is condemning their countries to slow growth. A stronger voice for the nationalist forces in the region would not only result in major financial setbacks for US banks but would also seriously hurt US investment and commercial interests in the region. Secret D/ /EEW 86-008 21 February 1986 25X1 25X1 Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP97-007708000100110001-0 ..I Declassified in Part -Sanitized Co A roved for Release 2011/12/29 :CIA-RDP py pp 97-007708000100110001-0 Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP97-007708000100110001-0 Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP97-007708000100110001-0 Italy: Worsening Budget Deficit Italy's continuing huge public-sector deficit, which The 1985 Italian Budget: Revenues is likely to top 16 percent of GDP in 1986, is and Expenditures, by Type placing strains on the economy and the five-party ruling coalition. Last-ditch efforts by the govern- ment to reduce the deficit failed earlier this month Percent when the lower chamber of the Parliament rejected Revenues many of the modest spending cuts proposed in the Lotteries 3 - 1986 budget. To finance the deficit, Rome will robabl have to boost monetar rowth and/or Customs and - P Y Y g excise tuxes 7 raise already-high interest rates. Either action will worsen Italian economic prospects. The first would Nontax fan inflation, hurting Italy's international eompeti- revenues 23 tiveness, while the second would cut back private investment. In any event, economic growth is likely to slow this year, intensifying strains within the taxes on - governing coalition over how to reduce the deficit transact;ons 2a and making early elections some time this summer a more likely possibility. Other I l Transfers to - household and The Italian expanded public-sector deficit'-estl- business s mated at $66 billion or 15.8 percent of GDP in social 1985-is one of the largest in the OECD. The security a deficit first rose above 10 percent of GDP in the Personnel 16 mid-1970s, reflecting the impact of the 1974/75 recession. Since then, the deficit has tended to drift upward mainly because of soaring expenditures. capital expenditures Government outlays last year equaled about 48 I ~ percent of GDP, more than double the level in the early 1970s. Interest payments on the public debt are the fastest growing element of government outlays. Total pub- lic debt currently equals GDP, and is growing at an ' The expanded public-sector deficit comprises the borrowing re- quirements of general government; autonomous agencies; municipal enterprises; and ENEL, the state-owned electricity monopoly. At the request of the IMF in 1976, Italy began using this definition of the deficit-which is somewhat greater than the gap between revenues and expenditures-as the target deficit because it provides a better picture of how the government's borrowing affects the Interest on debt 18 average of about 6 percent annually. Interest pay- ments on the debt have increased from 12 percent of budget expenditures in 1979 to over 18 percent last year. 3 Secret D/ /FEW 86-008 2/ February 1986 Income and estate taxes 43 Transfers to local and regional __ government 25 25X1 25X1 l Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP97-007708000100110001-0 ~~_ _ Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP97-007708000100110001-0 Italy: Government Revenues, Expenditures, and Expanded Public- Sector Deficits, 1971-86 Government Revenues and Expenditures Percent of GDP Expanded Public-Sector Deficitse Percent of GDP ~~~~I~~~~I~~~~I~ ~ 1971 75 80 85 86 e z This measure includes the borrowing requirements of the general government, autonomous agencies, municipal enterprises, and ENEL, the state-owned electricity monopoly and results in a deficit that is somewhat greater than [he gap between revenues and expenditures. b Projected.' More sluggish economic growth in the 1980s also has contributed to the deficit by slowing revenue growth and increasing outlays for unemployment compensation-the unemployment rate has jumped from 7.7 to 10.6 percent over the past six years. According to our econometric model, every per- centage point increase in the unemployment rate raises the budget deficit by $6 billion. Probably the most pervasive cause of growth in public expenditures, however, has been legislated increases in social outlays such as pensions and medical programs. The government's contribution to pensions, for example, has been increasing by an average of 9 percent annually in real terms over the past 15 years. The 1986 Budget Although the final touches are still being put on the 1986 budget, it looks as though it will call for a deficit target of $67 billion, or about 14.6 percent of GDP-1.2 percentage points less than in 1985. Spending is to be restrained by very modest cuts in pension contributions, transfers to local govern- ments, and other social expenditures. Cabinet members were reluctant to propose any significant cuts to the welfare system because that would hurt their party's chances in the next election, but even the small savings included in the cabinet's proposal met heated opposition in the lower chamber of Parliament. The government several times had to resort to open votes of confidence to get measures passed. The larger governing parties were divided internally on such controversial issues as raising medical fees and reducing family allowances, en- abling even the smallest party to block legislation that would reduce spending. As a result, the lower chamber added about $1.2 billion in spending to the cabinet's original proposal. The difficulty in implementing spending cuts has forced the government to look to enhanced revenue collection, concentrating on measures to make the tax system more equitable. Although some reforms have been enacted, tax collection continues to be 25X1 Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP97-007708000100110001-0 Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP97-007708000100110001-0 hampered by poor enforcement, and we estimate that possibly as much as half of Italy's potential value-added taxes go uncollected. Reforms are particularly difficult to achieve because the main offenders-small businessmen and professionals- make up a significant part of the large Christian Democratic Party's base of support. In fact, the 1986 budget includes a revision of the personal income tax system to compensate for recent infla- tion, leading to a $3.9 billion reduction in tax revenues rather than an increase. We believe that the estimate of the budget deficit is too low and that the actual figure will be about $73 billion-over 16 percent of GDP. The government's ambitious target of a $12 billion reduction in current spending probably cannot be achieved. It includes about $3.9 billion in spending cuts that have not been specifically determined, as well as some other savings, such as changes in bank re- serves and methods of calculating interest pay- ments, that are probably superficial at best. In addition, projected revenues are based on an overly optimistic forecast of 3-percent real GDP growth in 1986 and on the implementation of some one-time tax changes that have already been delayed by the Parliament for over two years. Implications for the Economy We believe the budget deficit has become a serious drag on the economy. Partly because of Rome's borrowing requirements, domestic credit expansion has consistently exceeded targets set by the central bank, and this has contributed to the current 8.6-percent inflation rate. Moreover, since 1976 the state share of domestic credit has grown from 42 to 74 percent-and these figures do not include bor- rowing by many of the state-owned companies. The Bank of Italy has repeatedly warned that govern- ment borrowing is reducing the amount of credit available to the private sector. Over the past de- cade, private investment's contribution to GDP has dropped from nearly 18 percent to just over 14 percent in 1984. The large public-sector deficit also has prevented Rome from lowering interest rates as much as other industrialized countries. In fact, interest rates on three-month and six-month treasury bills were recently increased because the government has been unable to sell enough bills to meet its matur- ing debt. Rome is relaxing many controls on Italy's financial markets, thus creating attractive new investment opportunities and making it more diffi- cult to sell government debt to the public without raising interest rates on treasury bonds. Real inter- 25X1 est rates-now at 7 percent-are a major factor in sluggish economic growth. The impact of the 1986 budget deficit on the economy will depend to a large extent on how much of it is financed through money creation~urrently the subject of heated debate within the govern- ment. Since 1980 the Bank of Italy generally has been able to limit the share of the deficit funded by money creation and is unhappy that it has been forced to step in recently when the Treasury could not sell enough bonds. The governor of the central bank has therefore called for interest rates to be raised in order to attract new investors. Many government officials, however, strongly oppose rais- ing interest rates because it would increase consid- 25X1 erably the government's interest payments on the public debt. They also fear that it might slow the economic recovery that has depended to a large extent on strong investment spending-although the investment boom has been largely financed by increased profits. The result is likely to be a compromise involving some increase in interest rates, but not enough to take all of the pressure off the money supply. Consequently, while factors such as falling oil prices and lower real wage gains will help hold down price increases, inflation is unlikely to come down to the government's target of 6 percent. The continuing inflation differential between Italy and its major trading partners will further erode Italy's international competitiveness. Unless offset by peri- odic devaluations, the decline in competitiveness Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP97-007708000100110001-0 4 Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP97-007708000100110001-0 will considerably negate anticipated improvements in the trade deficit resulting from lower oil prices and a falling dollar. Devaluations would probably be resisted by the other members of the European Monetary System, who admonished Italy to shape up its financial house when the currencies were realigned last July. Raising interest rates, on the other hand, will almost certainly slow investment spending. Our econometric model suggests that every percentage point increase in interest rates leads to a 0.5-percent decline in the level of invest- ment spending. Higher interest rates and the inability to reduce the inflation differential with its trading partners will contribute to the expected slowdown in Italy's economic growth this year. While real GDP ad- vanced by 2.4 percent in 1985, it probably will grow only 1.9 percent in 1986. As a result, the unemployment rate-at a historic high of 11 per- cent in the fourth quarter-is not likely to come down much, if at all, this year. The slowdown in economic growth will put in- creased pressure on the government to reduce the budget deficit and will intensify existing strains within the coalition over economic policy. There is little agreement among the coalition parties on how to reduce the budget deficit-the Prime Minister, for example, opposes raising taxes, the Treasury Minister claims new taxes are probably necessary, and the Finance Minister refuses to consider tax hikes until deep spending cuts are instituted. To attenuate the differences, Prime Minister Craxi is likely to shuflie the cabinet later this month, but the move may not be sufficient to reduce the tensions, making early elections sometime this sum- mer apossibility. 25X1 25X1 Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP97-007708000100110001-0 Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP97-007708000100110001-0 Make Slow Progress EC efforts to remove barriers to infra-EC trade and facilitate decisionmaking following the entry of Spain and Portugal have been delayed by the Danish Parliament's rejection of reforms adopted at the EC summit meeting in Luxembourg last December. Danish Prime Minister Schlueter has called for a referendum in his country on the reforms for 27 February. If it fails and Denmark thus is unable to sign the reform act, the rest of the Community would be forced to renegotiate the reforms in light of the Danish objections. Other EC states are firmly committed to reforms because of their potential to make EC decisionmaking more efficient, considered essential for revitalizing lag- ging West European competitiveness. The Reform Package The institutional reform package-the first changes proposed to the EC Treaty of Rome since its signing in 1957: ? Allows greater use of majority voting, though it does not guarantee faster decisionmaking. ? Defines new areas concerning creation of the internal market in which majority voting would apply, but leaves intact the ability of one member to block EC decisions on the basis of "vital national interests." Under the reform package, however, members and the EC Commission would be given the right to sue states abusing the veto, which should enhance the use of the majority vote. In contrast, another element of the reforms-granting the European Parliament additional powers to review Council decisions--mould even slow decisionmaking on some issues. Moreover, the package also specifies certain policy areas in which members retain the The main elements oj'the institutional reform pack- age agreed to by the EC summit meeting last Decem- ber include adding European Political Cooperation and the European Monetary System-both currently informal arrangements-to the Treaty of Rome, but locus on improving the EC decisionmaking process. The Single European Act: ? Sets the goal of establishing a internal market-defined as an area in which movement of goods, persons, services, and capital is ensured-by 31 December 1992. ? Establishes that all measures harmonizing national laws and regulations j'or the purpose of setting up the internal market will be decided on the basis of majority vote in the EC Council oj'Ministers and no longer by unanimity, exceptlor matters concern- ingindirect taxation, the budget, free movement of persons, and the rights of employed persons. ? Allows member states to exempt themselves .from harmonization because of major national needs- including environmental protection-but requires that not cation be given to the EC Commission, which in turn must cortf~rm that the exemption is not a means of arbitrary discrimination or dis- guised restriction of trade; the Commission or any member may sue before the EC Court oJ'Justice (f it believes another member is abusing this right. ? Permits the European Parliament to review Council of Ministers decisions-a so-called second reading. jf the Parliament rejects a Council decision, the Council can override the rejection by unanimous vote. The Act also encourages cooperative efforts on R&D, environmental protection, and social policy, and incorporates infra-EC economic development aid under the Treaty. The explicit goal of such resource transj'ers is the eventual convergence of member state economies. right of demanding unanimity. Secret DI /EEW 86-008 2/ February 1986 Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP97-007708000100110001-0 ~_ Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP97-007708000100110001-0 Referendum on EC Reform: The Internal Danish Situation The minority government'slailure to win parliamen- tary approval for the Luxembourg reform package on 21 January has endangered not only the progress of the reforms, but also has created a hot debate in Denmark. The Schlueter government contends that majority voting on internal market issues will benefit Denmark economically, and that wider powers for the European Parliament and the formalization oflor- eign policy cooperation will have little practical effect. The opposition Socialist parties disagree, ar- guing that these measures dilute the principle oj' national sovereignty-a particular Danish concern as one oj'the smaller countries in the Community. The opposition also fears that environmental protection- an emotional issue in Denmark-might not always take precedence over the removal oj'trade obstacles. Anticipating last month's unfavorable parliamentary vote, Schlueter took a gamble and called a consulta- tive referendum for 27 February to resolve the issue. The referendum vote is likely to be a victory.for Schlueter and strengthen his center-right coalition. Polls indicate the electorate supports the reforms 48 percent to 33 percent. A yes vote could also help the government put through many unpopular economic measures necessary to address Denmark's chronic balance-o,J=payments problems. The prime minister and other supporters oj"the reforms, including industry and many trade unions normally loyal to the opposition Social Democratic Party, are equating a no vote to a question oj' If the reform package succeeds, it would be an important step toward improving the Community's ability to dismantle the myriad nontariff barriers to infra-EC trade that are a drag on European com- petitiveness. The political commitment to remove these barriers by 1992 depends on a detailed timetable of over 300 highly technical harmoniza- tion measures, all requiring member state approval. continued Danish EC membership, hoping to sway votes Jrom the Social Democrats. Although none of the political parties takes much interest in the wider ideals oj'European integration that inspired the ECs .founders-in.fact, most Danesfeel a greater attach- ment to the Nordic region and its institutions-there is little incentive for a Danish withdrawal. The total financial benefit that Denmark derives from EC membership is difJ~cult to quantify, but in 1983 and in 1984 direct net benefits-largelyfrom the Common Agricultural Policy-amounted to about $260 million a year. Community membership brings Denmark substantial economic advantages. Agriculture and fisheries, both crucial to Denmark's economic well-being, would be hardest hit if the Danes withdrew. Agricultural exports in 1985 ac- countedlor more than two-thirds of agricultural production and more than one-fourth ojtotal Danish exports, of which roughly half went to EC markets. Denmark received about $625 million in agricultural subsidies in 1983-84, which, if lost, wouldforce a major economic restructuring. According to the US Embassy, foreign exchange earnings would drop by a projected $1.5 billion, severely damaging Denmark's credit rating and its ability to pay off its large foreign debt. In the fisheries sector, direct subsidies are limited, but if Denmark were excluded lrom EC waters the Danish catch would shrink by as much as 60 percent. The direct cost would be almost $250 million in sales, and 5,000 jobs, with more employ- ment losses in other related sectors. Even with increased use of majority voting, it will be difficult for the EC to meet this schedule, but virtually impossible without it, especially with the addition of Spain and Portugal. The reform effort has had the support of all the member state governments. Italy-instrumental in Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP97-007708000100110001-0 Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP97-007708000100110001-0 launching the effort at the Milan Summit in June 1985-and the Benelux countries have been most supportive, but even the United Kingdom, Greece, and Denmark, who initially opposed amending the Treaty of Rome and holding a special intergovern- mental conference as the mechanism for reform, contributed constructively to the four-month-long reform conference. All the member states except Denmark, Greece, and Italy signed the Single European Act reform package amending the Rome Treaty on 17 Febru- ary. Greece and Italy, while in basic agreement with the Act, will withhold their signatures until Denmark is ready to sign. The Act cannot legally take effect until signed and ratified by every mem- ber state, giving the Danish Parliament an effective veto. Should Denmark Not Sign Although considered unlikely, rejection of the re- form package by Danish voters in the 27 February referendum would prevent the government from signing the Act and thus block the reforms for the entire Community. In that event, the EC would be thrown into one of its periodic crises. Foreign policy initiatives and the resolution of pending trade disputes with the United States would almost cer- tainly be given secondary priority. The initial incli- nation of the members would probably be not to reopen reform negotiations-as, indeed, EC foreign ministers have recently told Danish Foreign Minis- ter Ellemann-Jensen in prereferendum consulta- tions-for fear of shattering the complicated com- promises the reform package is based upon. In the end, the rest of the EC would probably agree to reopen negotiations and seek to modify the aspects of the reform package objected to by Denmark. If that proved too difficult, the members might seek an informal agreement instead of a formal treaty amendment. The Netherlands, the current president of the Council of Ministers, al- ready plans to persuade members on a case-by-case basis to use majority voting before the reforms take effect. Italy, because of strong domestic pressure to strengthen the European Parliament, probably would block any attempt by Denmark or any other EC member to dilute the reform measure that gives limited new powers to the Parliament. In any case, a no from Denmark on reforms could further isolate it politically within the Community, ensur- ing that Danish concerns on key matters of self- interest-the environment and agriculture-would be heard much less sympathetically by the other members. 25X1 25X1 25X1 Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP97-007708000100110001-0 I! 1 I I Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP97-007708000100110001-0 Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP97-007708000100110001-0 Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP97-007708000100110001-0 Jordan: Keeping Its Head Above Water Jordan's abrupt economic slowdown-and the real- ization that renewed rapid growth is unlikely-has prompted the government to take a more serious look at its economic strategy. Rising unemployment and uncertainty about the levels of foreign aid and worker remittances are Amman's greatest con- cerns. The government's efforts over the past year suggest it is willing to lower its own sights on what it can accomplish and look to the private sector for help. Jordan's moves to date have been cautious, however, and the country's economic fortunes will remain for some time largely dependent upon for- eign assistance. Resource-poor Jordan relies heavily on the generos- ity of the Gulf states to keep its economy afloat. Arab aid and remittances from the approximately 300,000 Jordanians working abroad-equivalent to 40 percent of the total labor force-account for nearly two-thirds of the country's hard currency receipts. The oil price boom of the 1970s increased these flows sharply and spurred annual GNP growth of almost 10 percent. The recession spread- ing through Gulf states as oil revenues fall is taking its toll on Jordan: ? Gross worker remittances dropped about 10 per- cent in 1985 and are not expected to pick up soon. In fact, the increase in 1984 remittances appears to have been an anomaly as returning workers brought home savings. On the plus side, the Jordanian Government is not expecting a rapid return of the remaining workers abroad given their high skills and education vis-a-vis other guest workers. ? Arab aid totalled $640 million last year, less than half that received during the peak year of 1980. Only a successful barnstorming trip by King Hussein last summer prevented still another de- cline: He was able to drum up some Baghdad Jordan: External Million US $ Economic Indicators, 1981-85 Current account balance Trade balance Exports (f.o.b.) Imports (c.i.f.) Net services Net worker remittances Unrequited transfers Arab aid Official foreign exchange reserves Medium- and long- term external debt accord payments from recalcitrant donors Kuwait and Qatar and also secured a hefty gift from Oman. The poor record of these two major hard currency sources was offset somewhat by an improved trade balance over the past three years. Exports-con- sisting largely of phosphates, chemicals, fruits, and vegetables-have picked up following a severe slump in 1983, primarily on the strength of in- creased sales to Iraq. Even some of these gains are more illusory than real-as Amman has been forced to extend government-guaranteed credits to enable Baghdad to make the purchases. Imports have dropped the past three years, but most of the Secret D./ IEEW 86-008 2/ February 1986 -42 -335 -389 -269 -170 -2,435 -2,488 -2,456 -2,027 -1,910 735 751 580 757 780 3,170 3,239 _ 3,036 2,784 2,690 1,088 1,093 1,254 1,044 980 2JX~ 875 907 909 983 920 1,305 1,060 813 714 760 1,197 953 712 593 643 1,049 848 798 500 423 2,005 2,411 2,942 3,400 3,900 Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP97-007708000100110001-0 .. _ Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP97-007708000100110001-0 fat has been cut. The Jordanian economy still relies heavily on imports of foodstuffs, raw materials, and machinery, and further cuts could prove more Jordan: Economic Indicators, 1981-85 costly to overall economic performance. Over the past few years, Jordan has drawn down its official foreign exchange reserves to help close its financial gap. Reserves fell sharply in both 1984 and 1985, and the current level of about $420 million covers only about two months' worth of imports. Jordan's credit rating has not suffered unduly during the recent crunch, however. A $200 million syndicated loan-the third large syndica- tion in three years-was oversubscribed last year. Nonetheless, Amman is concerned about relying on borrowing because its external debt has nearly doubled since 1981 and debt-service obligations continue to climb. Domestic Impact Slowing GNP growth reflects Jordan's problems with its external accounts. Recently revised statis- tics put annual GNP growth at about 2 percent for the last three years-a negative per capita rate given Jordan's population growth of almost 4 per- cent per annum. Amman had hoped growth would be spurred as new industrial projects came on line in 1984. But poor world markets, in general, and the leveling of sales to Iraq, in particular, quickly burst that bubble. Investment, too, has suffered, falling well short of planned levels over the past three years. The public is only now beginning to feel the pinch. Much of the past decline in consumption is largely the result of reduced imports of luxury items and therefore has not been a significant burden. Con- sumers also have been helped by the low inflation rate, which shows few signs of increasing in the immediate future. Rumors are circulating in Am- man of a possible devaluation of the dinar, which, if proved true, would eventually lead to price hikes. Growth in Per Capita Consumption Percent Production Percent Consumer Price Inflation Percent 25X1 25X1 Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP97-007708000100110001-0 Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP97-007708000100110001-0 Secret The Jordanian public is worried, however, about creeping unemployment. According to the US Em- bassy, Jordanian officials have put the unemploy- ment rate at about 8 percent, a high figure for a country that traditionally prides itself on no em- ployment problems. One Jordanian official believes the rate could double by the end of the decade, while a recent World Bank study projects a possible rate as high as 30 percent because of returning workers and an influx of new graduates. Moreover, these rates fail to consider the large and growing number of idle workers kept on the payrolls of numerous government-operated enterprises. The Government's Strategy The government is aware that it must take a more serious look at its economic prospects. Indeed, the appointment of a more activist Prime Minister last April may have been, in part, a move to help stimulate the economy. The new government ap- pears to recognize its financial limitations-for example, this year's budget essentially shows no growth-and is actively seeking help from the private sector: ? The government rescinded a scheduled law that would have required Jordanian majority owner- ship of all banks, because some foreign banks were threatening to leave. ? Amman is planning to sell some government businesses. Talks have been under way for some time regarding the telecommunications company, and the government hopes some time this year to offer the public the opportunity to buy shares in ALIA, the government-run airline. ? Last summer the parliament approved a variety of measures aimed at protecting local industries and stimulating exports. Duties on luxury goods also were increased, restrictions imposed on the importation of many goods also produced locally, and tax exemptions hiked for export-oriented industries. ? The government is continuing with its plans to have Amman replace war-torn Beirut as the major center for services in the the region. Cur- rent efforts focus on developing the infrastructure needed to support such operations. Jordan is also making job creation a high priority. Last month the government began cracking down on illegal workers, who constitute about one-fourth of Jordan's estimated 150,000 foreign workers. Among the new measures are deportation for non- registered workers, higher fees for work permits, increased fines on firms hiring illegal workers, and 25X1 improved monitoring at immigration points. Al- though Jordan's 1986-90 five-year plan has yet to be published, the Embassy reports that job creation will be a major component. The government pro- jects that increased investments and fewer foreign workers will enable it to lower unemployment to an acceptable 5 percent by 1990. The government's economic plans are tempered by political realities. Amman's location in the volatile Middle East makes it hard enough to encourage Jordanians to keep funds home, let alone entice new foreign capital. The threat of violence already has slowed efforts to bring service operations to the capital. In addition, the unwillingness of many Jordanians to invest in domestic projects will hinder privatization efforts. In the near term, Jordan will continue to look outside its borders for financial help. Moves to increase self-sufficiency are costly, and human capital remains Jordan's principal asset. The King has proved to be an adept fundraiser and the Jordanians reasonably sound money managers. Without any unexpected external shocks, the coun- try should be able to keep its head above water. 25X1 25X1 Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP97-007708000100110001-0 Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP97-007708000100110001-0 Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP97-007708000100110001-0 Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP97-007708000100110001-0 Secret Poland: The Status of Foreign-Owned Firms Over the past several years, Warsaw has promoted the establishment of Western-owned companies in Poland-so-called Polonia firms-as a way to in- crease market supplies and generate hard currency earnings. As their numbers have grown, so has criticism of some Polonia firms and the high wages paid their employees. Despite the controversy and the resulting tighter government regulation, we expect this highly productive sector of the Polish economy to remain active for the next several years. Nonetheless, tighter regulation has dealt a setback to government efforts to attract large-scale Western investment. Polonia firms account for a very small share of total Polish economic activity-the approximately 640 Polonia firms produced 0.4 percent of Poland's 1984 output and employed about 42,000 workers or 0.2 percent of the labor force. These enterprises, however, provide about 10 percent of the total output of Poland's private industrial sector. Most of these enterprises produce consumer goods such as clothing, furniture, cosmetics, or leather goods, which, though generally more expensive, are widely preferred to the shoddy state-produced goods. In addition, Polonia firms provide almost 25 percent of Poland's medical and laboratory supplies, pro- duce mine safety, environmental, and electronic equipment, including computer components, and many chemicals and construction services in short supply in Polish markets. Warsaw initially sought Polonia businessmen for their contacts in Western markets. Polonia enter- prises later came to be viewed as a source of "costless" investment capital and Western techni- cal and managerial skills. Polish officials hoped that the firms would prod state enterprises into more efficient production while producing consum- er goods using scrap or surplus materials, vacant buildings, and underutilized machinery. Polonia firms were also expected-although not legally required-to use their own funds to import raw materials in short supply, thus saving Poland's resources and hard currency. Government promotion of Polonia enterprises be- gan in the late 1970s, and culminated in the legislation of July 1982, which offered foreign entrepreneurs tax advantages and legal autonomy far exceeding those enjoyed by private Polish- owned firms. Provisions of the 1982 law granted new Polonia enterprises: ? Exemption from taxation for three years. ? A 50-percent ceiling on the income tax rate thereafter. ? Freedom to set prices and use material incentives to increase production. Partially offsetting these generous terms, the law required that 50 percent of hard currency export earnings and all domestic zloty profit remain in Poland until the enterprise's liquidation. Western entrepreneurs were enticed by the avail- ability of a skilled, low-paid work force, a high demand for consumer goods, and the prospect of gaining access to markets in other socialist coun- tries. During 1981-82 the number of new permits mushroomed from 68 to 230, the number of Polo- nia employees more than tripled, and the combined sales revenues of all Polonia firms increased almost fivefold. Perhaps most significant, the export reve- nues of Polonia firms in 1982 were over 500 percent larger than the previous year. Success brought problems, however. In late 1982 the Ministry of Finance charged some Polonia firms with earning "excessive" profits, transferring Secret DI IEEW 86-008 2I February 1986 25X1 25X1 Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP97-007708000100110001-0 Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP97-007708000100110001-0 Secret their profits abroad illegally, luring skilled workers from the public sector, bidding up the prices of scarce domestic inputs, charging "designer" prices for their products, and neglecting their investment obligations. Premier Jaruzelski, who had encour- aged the formation of Polonia firms in 1982, criticized them in February 1983 for ignoring their responsibilities and said they would have to learn to operate in accord with the social and economic interests of Poland. Consequently, new restrictions were enacted in late July 1983. The three-year tax holiday was made contingent on a firm's investing annually at least one-third of its earned income. The 50-percent ceiling on corporate taxes was raised to 85 per- cent-although in practice reductions of up to 20 percent were allowed when the firm produced "socially desirable goods" such as medical and agricultural equipment. The government also or- dered the Polonia firms to exchange 50 percent of their hard currency earnings for nonconvertible zloty. The legislation apparently was accompanied by closer scrutiny of Polonia applications. The govern- ment granted only 117 new permits in 1983 and 142 new permits in 1984. According to Polish statistics, the rejection rate in 1984 was nearly 50 percent. Consequently, about 700 Polonia firms were authorized to operate in Poland by the end of 1985 compared with 1982 predictions of 1,000 such firms by that date. The government seems to have been successful in channeling Polonia firms into sectors it considers essential, such as the medical and computer fields. Although some advocates of Polonia claim that the new rules encourage entrepreneurs to liquidate their operations after three years and then start wholly new endeavors, Polish officials claim that such behavior is acceptable since they want Polonia firms to be temporary instruments for filling mar- ket shortages. Restrictions on the entrepreneurs' use of hard currency earnings probably has, on balance, worked against Poland's interests by reducing im- ports of Western goods. Many state enterprises previously obtained Western machinery and spare parts by collaborating with Polonia firms that had hard currency. Moreover, Polonia firms have also been compelled to rely as much as possible on domestic inputs, thus increasing the competition for the country's meager resources. The hard currency restrictions also have dampened incentives to export to the West at a time when Warsaw needs to maximize its hard currency earn- ings. Thus the value of Polonia firms' exports to the West increased only 44 percent in 1984 over 1983 levels, while the value of exports to socialist coun- tries grew more than 450 percent. The "typical" Polonia firm now seems to produce its main line of output for the Polish market while exporting to the West small quantities of unrelated goods in order to finance imports. One good example is a firm that produces roach traps for Polish consumers and exports machine tool subassemblies to the United States to finance imports of insecticide and glue. Continued Controversy and More Regulation Despite restrictive regulations, the controversy over Polonia firms has continued. The frank admission in the Polish press that Polonia firms are five times more productive and pay wages twice as high as state enterprises has raised the ire of political hardliners and workers in the large socialized sec- tor. In addition, some foreign investors who choose to reside in Poland use their zloty earnings to support a conspicuous lifestyle. Members of parlia- ment cited Polonia firms as a "serious social prob- lem" in late 1984, and trade union representatives declared their opposition to Polonia firms in Sep- tember 1985. Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP97-007708000100110001-0 Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP97-007708000100110001-0 In defense, Polish officials have publicized some "success" stories. A recent press article credited Polonia companies with breathing life into the microcomputer industry, calling them the main source of microcomputer components in Poland, and lauding instances of cooperation with state enterprises. Last August, the party daily contained an article about the Polonia firm Plastomed, which produces medical equipment and chemical diagnos- tic reagents, and noted its contribution in meeting health service needs both in Poland and in many other socialist countries. Polish officials also paid tribute, at a school dedication ceremony, to the renovation services provided by a US-owned con- struction firm last September. Nonetheless, the government has further tightened the reins. Over the past two years 40 foreign firms have had their licenses taken away and more than $2 million worth of zloty fines and extra taxes have been levied. Further regulations in January 1985 increased to $50,000 the hard currency deposit required to start a Polonia firm and also required that the first $50,000 in profits be reinvested in the company. A government directive issued last Au- gust requires Polonia firms to use official govern- ment channels to hire Polish workers-a measure designed to prevent workers from quitting solely to seek higher paying jobs with foreign-owned firms. Local government authorities have further compli- cated the Polonia business environment. Some pro- vincial governments require that local residents be given priority in hiring, have imposed age restric- tions on Polonia's employees, or have tried to ensure that local markets have a priority claim on the firms' output. Polonia firms could probably lose their licenses for failing to fulfill such additional obligations. Despite the controversy and the shifting regulatory climate, Polonia firms are likely to remain part of the Polish economy for at least the remainder of this decade. Although the government will continue to fiddle with the rules, it probably will not be under strong pressure to make dramatic changes. Tighter regulation has partially disarmed critics by minimizing flagrant abuses and channeling firms into more highly valued endeavors. Polonia busi- nesses can still be very profitable because of tax breaks in the first three years and because Polish authorities have a great deal of discretion to reduce a firm's financial obligations after the grace period, particularly for entrepreneurs who undertake prior- ity investments. Even many of those who dissolve operations at the end of three years opt to remain in Poland to start up a new venture. The lure of profits is key, but many probably also decide to stay because of their considerable zloty holdings and their hard-earned familiarity with Poland's regulatory peculiarities. Nonetheless, the controversial environment and the regulatory instability of the past few years have undoubtedly had some negative impact on the investment climate. The Polish parliament is con- sidering ajoint-venture law aimed at encouraging large-scale Western investment, but the Polonia experience may dissuade some potentially valuable investors. 25X1 25X1 Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP97-007708000100110001-0 I! I I I I Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP97-007708000100110001-0 Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP97-007708000100110001-0 Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP97-007708000100110001-0 Secret Key LDC Debtors: Limited V Progress on Tax Reform Large government budget deficits are impeding needed tax reforms in the 15 countries targeted by the Baker Initiative.' Although a major concern is that tax reform can reduce government revenues and worsen the deficit problem, reform is also being stalled by substantial political opposition. These two constraints to tax reform could be substantially eased if, as in the Baker plan, increased donor assistance is made conditional upon the implemen- tation of meaningful tax reform. Tax reforms can increase efficiency and equity in the economies of key LDC debtors, stimulating economic growth over the longer term. Several of these key LDC debtors have recently introduced, or are presently considering, meaning- ful tax reforms: ? Colombia has adopted major tax reforms over the past three years. A 1983 tax reform lowered rates, broadened the tax base, increased the revenue-generating power of local governments, tightened enforcement mechanisms, and intro- duced alimited tax amnesty. Avalue-added tax (VAT) was introduced in 1984. ? After more than four years of IMF prodding, Morocco's proposed tax reform package is sched- uled to begin in April with a new VAT. This is the first of three new taxes that will replace the existing intricate and outmoded tax system. A corporate income tax is to be debated in parlia- ment this spring, followed eventually by a person- al income tax. Concern over the inflationary Selected LDC Debtors: Budget Balances as a Share of GDP, 1985 Equador Brazil Chile Argentina Peru Philippines Morocco Mexico Bolivia potential of the VAT could delay its implementa- tion. Some government officials fear local retail- ers may use the VAT as a pretext to raise prices, an outcome that could spark civil unrest. ? In Chile, austerity has delayed reforms of person- al and corporate income taxes. Although Santia- go began annual phased tax rate reductions in 1984, it announced last fall that the personal income tax reductions scheduled for 1986 will be suspended for two years in an attempt to meet IMF deficit targets. ' Candidates for the Baker plan, which increases IMF lending to LDCs undertaking important economic reforms, are Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Ivory Coast, Mexico, Morocco, Nigeria, Peru, Philippines, Uruguay, Venezuela, and Yugoslavia0 Secret D/ /EEW 86-008 21 February 1986 Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP97-007708000100110001-0 i Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP97-007708000100110001-0 Secret ? Peru announced tax rate reductions last Decem- ber aimed at promoting economic growth while striving to minimize revenue losses. The govern- ment reduced top marginal rates from 65 to 45 percent on personal income and from 57 to 40 percent on corporate income. Since then, it has also lowered the VAT from 11 to 6 percent. Business deductions were tightened substantially to offset the revenue loss. Another group of these countries has introduced limited tax reforms while pursuing revenue increases: ? Argentina imposed a forced savings scheme upon producers in 1985. The government also intro- duced progressive new taxes on transfers of stocks, bonds, and real estate. Tax revenues in- creased by 2.5 percent of GDP. ? Brazil's 1986 economic package closes some cor- porate loopholes and makes individual income taxes more progressive while seeking tax in- creases equal to 1.4 percent of GDP. ? Mexico's 1986 budget increases tax progressivity through a special tax on upper- and middle- income groups and higher taxes on nonessential goods. The government also promises to combat tax evasion while attempting to halve the budget deficit to 4.9 percent of GDP. ? Nigeria made minor changes in its income tax in 1985. Revenue from this source, however, re- mains minuscule. ? The Philippines, under IMF pressure to reduce its deficit, is working to simplify its tax structure. A variety of minor tax changes announced in December will probably raise revenues slightly without introducing meaningful reform. ? Venezuela, in a recent crackdown on widespread tax evasion, has substantially broadened with- holding to apply to professionals and company subcontracting. Faced with falling oil prices, the government has also raised domestic gasoline taxes by 30 percent. ? In Yugoslavia, where federal expenditures equal only 12 percent of all government outlays, Bel- grade is likely to reduce taxes on earned income in 1986 and to increase taxes on unearned income such as interest and rent. ? In Bolivia, the US Embassy believes this year's most likely tax innovation may be a heavy tax on individuals and corporations that had access to highly overvalued central bank foreign exchange during the Siles presidency. Because of heavy opposition to more taxation, the government is using nontax mechanisms to reduce sharply its deficit as a share of GDP. One mechanism likely to be abrogated in the Senate is the very unpopu- lar "forced loan" that funds the retirement bene- fits of 15,000 government workers who will be displaced this year. In the other LDC debtors targeted by the Baker Initiative-Ecuador, Ivory Coast, and Uruguay- there is little or no evidence of government interest in tax reform. We believe that, in response to donor pressure and economic necessity, growing numbers of LDC gov- ernments will seek over the next two years to implement significant tax reform. Nonetheless, the need to increase revenues to reduce budget deficits may severely limit the pace of tax reform. Addi- tional external assistance tied to reform efforts, as proposed in the Baker plan, could accelerate tax reform by alleviating the revenue constraint and mollifying local political opposition. The progress of tax reform that we foresee among key LDC debtors may falter if economic growth in these countries slows before their budget deficits are brought under control, even if reform is tied to donor assistance. In that event, a deteriorating revenue picture would probably doom LDC tax reform for the next several years and reduce Third World economic prospects even further over the longer term. 25X1 25X1 Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP97-007708000100110001-0 Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP97-007708000100110001-0 Boom in Angolan Oil Exploration Energy The director of production for Angola's state oil company expects exploration in Angolan offshore waters to continue to boom during 1986 and 1987, Six foreign oil companies are leading the Largely on the basis of this exploration, some industry experts forecast anear- doubling of Angolan production by 1990 to 400,000 to 500,000 b/d. expansion: ? Chevron-Gulf (US) will complete atwo-year, $500 million expansion pro- gram by the end of 1986 and is beginning seismic studies to expand its area of production in 1987. ? Texaco (US) plans to lease an additional drill ship in April to develop a field discovered last November. ? Conoco (US) probably will sign an exploration agreement with Angola this month. It has released tenders for offshore seismic work and expects to drill six exploration wells beginning in October-December of this year. ? AGIP (Italy) will employ three offshore drilling rigs to develop a field discovered in late 1985 and approved by Angola for development in January. ? ELF-Aquitaine (France) will add two drilling rigs this summer to carry out the second phase of an exploration program begun in 1984. ? ESPA (Brazil and Belgium) is continuing a 12-well exploration program. 25X1 25X1 Mozambican Oil Agreement With Iran Zimbabwean Interest in Oil Refinery Development and heavy foreign debt. Maputo probably will accept a recent Iranian offer of crude oil, despite its re- luctance to accede to Iran's pressure for political support in the Iran-Iraq war. Mozambique has been desperately seeking new sources of oil since Iraq cut off shipments in 1981, according to US Embassy reporting. The Soviet Union has supplied 3,000 b/d-about 20 percent of requirements-since 1984. The agreement with Iran calls for deliveries of 10,000 b/d, with payment on easy, no-interest terms after aone-year grace period. These credit terms probably will prove irresistible to Maputo in light of its severe foreign exchange shortage The government is moving forward with plans to either build a new oil refinery or refurbish its nonoperational refinery at Feruka petroleum imports in 1984. refinery, while estimates place the cost of modernizing the Feruka refinery at $100-120 million. The government believes that high operating costs will be more than offset by substantial long-term foreign exchange savings. The US Embassy reports that Zimbabwe at present imports only refined petroleum products and spent 16 percent of its total export earnings-$185 million-on Kuwait reportedly has offered to assist in developing a new Secret Dl /EEW 86-008 11 February 1986 25X1 25X1 25X1 25X1 25X1 . Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP97-007708000100110001-0 '~ ~ .. i Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP97-007708000100110001-0 Secret Albania Seeking Algerian Aid jor Oil Industry Venezuelan Debt Rescheduling Set also views Algeria as an acceptable partner ideologically. Foreign Minister Malile traveled to Algeria last week-the first bilateral official visit by an Albanian foreign minister since 1967-to request help for the nation's troubled petroleum industry. Tirane last month reported another drop in petroleum production during 1985 following an 18-percent decline from 1981 to 1984. Malile's meeting with Algerian oil officials coincided with a visit by Algerian petroleum experts to Albania. New Albanian leader Alia has given top priority to the petroleum sector. Oil products are Albania's leading hard currency export, accounting for 25 percent of earnings, and provide over half the country's energy needs. Tirane apparently hopes that Algeria, which has helped it obtain oil equipment in the past, will provide expertise and Western technology, probably on barter terms. Albania probably Venezuela and its creditor banks are on track to sign accords in New York on 26 February to reschedule $21.2 billion in public-sector debt, Maturities originally due in 1982-88 will now be repaid over the period ending in 1997. Another $4.1 billion in pub- lic debt-mainly owed to official lenders and bond holders-is not a part of the refinancing and is bein re aid on schedule. There remains concern that the deal could misfire. implementa- tion would be blocked if banks holding 5 percent of the rescheduled amount re- fused to go along. Some banks-mainly US regionals-are upset because the government has not guaranteed the foreign obligations of certain private principal payments due this year under the original terms. term threat to the accords is posed by the collapsing oil market. Venezuela is already negotiating an eleventh-hour amendment postponing $923 million in The refusal of a US bank to participate in the revamped 1983-84 London Club Moroccan Rescheduling debt rescheduling could sabotage the entire accord. The bank reportedly wants more favorable terms for repayment of its $10 million loan. Embassy reporting indicates efforts are currently under way to convince the bank to reconsider its position, but that success is far from imminent. According to Moroccan Minister of Finance Jouahri, if the bank persists, Rabat will take back the $83 million paid to London Club donors to inaugurate the program and will force a complete renegotiation. Collapse of the 1983-84 rescheduling would aggravate Morocco's already precarious financial position and further strain relations with commercial creditors. Moreover, it could well derail the country's $200 million IMF standby and would almost certainly postpone discussions to reschedule debt obligations for 1985 and 1986. Secret 1/ February 1986 25X1 25X1 25X1 25X1 25X1 25X1 Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP97-007708000100110001-0 Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP97-007708000100110001-0 Secret East Germany Moves To Cut Borrowing Costs East Germany has requested "technical adjustments" to three loans syndicat- ed in 1984-85 for $1.5 billion. the East 25X1 German Foreign Trade Bank in ate anuary as ce cre hors to convert the loans, much of which has not yet been drawn, to revolving credits for the entire terms of the loans, and to reduce annual fees and interest rates. Under the 25X1 original terms, availability of undrawn funds expires next month. 25X1 most lenders will accept the revised terms and that other 25X1 Taiwan's Asian Development Bank Membership syndication members will take the shares of banks electing to drop out. While East Berlin had been accepting comparatively costly terms in order to obtain large, oversubscribed loans, the East Germans apparently have concluded that their improved financial health puts them in a strong position to renegotiate better terms. Success in the effort will solidify East German 's reputation as the most creditworthy East European country. 25X1 Governors in April. Taiwan's leaders apparently have agreed on a strategy for staying-at least for now-in the Asian Development Bank. Recent articles in the party-controlled press indicate that Taipei will continue publicly to reject any name change while tacitly agreeing to the "Taipei, China" formula supported by the Bank. Taipei will not participate in any Bank meetings but will not formally withdraw. The Bank cannot expel members, and Taiwan's leaders appear to have decided that Taiwan's continued participation in the Bank outweighs any domestic gains it would make by withdrawing to protest China's admission. Because Taipei remains wary of appearing to have "negotiated" with the mainland over its membership, it may still withdraw from the Bank after Beijing becomes a member at the annual meeting of the Bank Board of Japanese Trade Policy The report of Prime Minister Nakasone's special advisory commission on trade Study Group Report policy-due in late March-will contain no major trade initiatives, according to our preliminary analyses. The US Embassy expects general policy guidance rather than specific "how to's." Recommendations will probably include tax 25X1 incentives for consumption and investment, support for international efforts to limit exchange rate fluctuations, continued financial liberalization, and domes- tic demand expansion. Any reference to economic stimulus, however, will be tempered by the study group's strong support for Tokyo's five-year-old fiscal austerity effort. The Embassy also anticipates short-term measures, such as additional LDC financial assistance, to improve good will toward Japan in a time of increasing trade imbalance. The Japanese press has speculated that the group may recommend reducing the share of the current account surplus from 3.6 to 2 percent of GNP by 1990. Although Nakasone has made statements fa- voring acurrent account target, MITI and the Finance Ministry still strongly oppose numerical targets.~~ 25X1 Secret 21 Fe6ruart~ 1986 Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP97-007708000100110001-0 ,. I ~ .. ,.. _ ,I I _.. I .. Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP97-007708000100110001-0 Growing Chinese- Hong Kong Trade Ties British and Soviets Renew Trade Accord Swaziland To Quit Monetary Union With South flfrica Secret 2/ February 1986 may cause Hong Kong's exports to China to fall off in 1986. Hong Kong will open a trade promotion office in Beijing later this month, the colony's first official representation in China. A second office is scheduled to open in Shanghai before yearend. The opening of the trade office reflects the substantial growth in economic ties since the Sino-British accord to transfer the territory was signed in late 1984. Last year Hong Kong's exports to China increased 77 percent in the first 10 months of the year, counteracting a slump in exports to other markets. We estimate that two-way trade exceeded $15 billion in 1985, about 25 percent of Hong Kong's total trade. China displaced the United States last year as the colony's largest trading partner. Beijing has actively pursued closer economic links to promote the territory's stability and prosperity, but much of the increase in Hong Kong's exports has stemmed from China's trade decentralization, which has allowed localities to deal directly with foreign firms. China's recent efforts to cut its trade deficit Global and Regional Developments gas treatment and coal gasification projects. Moscow and London initialed a new five-year trade accord earlier this month, signaling a mutual desire to improve bilateral relations. The pact-a 1975 agreement expired last December-presumably will be formally signed when Foreign Minister Shevardnadze visits London this spring. The accord offers few specifics, emphasizing instead broad areas where trade could increase, such as construction projects. Although British trade officials do not expect any boom in trade as a result of the agreement, they hope at least to reverse the recent decline. According to UK statistics, bilateral trade in 1985 fell 20 percent from the previous year to roughly $1.8 billion. British firms also calculate that the accord will help them win bids for such Soviet projects as chemical plant construction, modernization of a textile factory, and a role in rand last year. Lesotho probably will stay in the union. Mbabane has negotiated a revision to the 1974 trilateral agreement with South Africa and Lesotho that effectively will remove Swaziland from a monetary union with those countries. Although retaining special access to South African capital and foreign exchange markets, Swaziland will no longer be required to back its currency 1 to 1 with the South African rand nor to accept the rand as legal tender. Swazi officials have stated that the move-which will allow some freedom to set interest rate policies-was prompted by the sharp decline of the Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP97-007708000100110001-0 Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP97-007708000100110001-0 Secret Salvadoran Austerity Protests National Developments Less Developed Countries Both the far left and the far right are attempting to discredit President Duarte's administration by attacking his economic initiatives. Despite the government's efforts to cushion the impact of austerity on workers, Marxist 25X1 labor leaders have called for demonstrations today that the Embassy expects will draw as many as 10 000 artici ants-or anizers h m w 1 in excess of that number. the 25X1 guerrilla leaders hope to foment a general strike by spring. Conservatives have also been vocal in their attacks on Duarte's economic policies, Despite pressure from economic Reluctant To Impose Austerity Libyan Agriculture Hurt by Sanctions measures and escalating guerrilla destruction of economic targets. advisers and international creditors to stand firm, Duarte will be hard pressed to ignore public demands as living standards are further eroded by austerity 25X1 ~~x~i 25X1 President Cerezo is challenging his economic advisers to come up with imaginative policies that will not require further sacrifices by the poor, Cerezo now flatly refuses any devaluation or cuts in public services. In 25X1 contrast, he supports lowering gasoline prices because of lower world oil prices. Cerezo hopes to meet financial requirements by hiking luxury taxes, improving tax collection, and relying on possible increases in foreign aid. Cerezo's populist leanings are splitting the cabinet and have encouraged the emergence of a "social group" that is increasingly opposed to the social costs of the austerity proposals . Cerezo's efforts to protect 25X1 the poor may win him temporary public favor, but they are likely to discourage business leaders and international creditors, and make future economic adjustments more painful. 25X1 . Despite earlier indications, 25X1 Libya has been forced to cancel at least one major seed order with a US suppli- er because of US sanctions. Libya 25X1 cannot arrange legal payment under US trade restrictions for 800 metric tons 25X1 of seed for the Kufra agricultural project. The delay probably precludes planting during the spring cycle at the desert project, which accounts for about 20 percent of Libya's annual production of beans and onions. Libya has no do- mestic seed production capability and prefers US seed, which has superior germination and yield compared with European stock. The anticipated shortfall will exacerbate already serious food shortages in Libya 25X1 a recent food riot in Banghazi involving 10,000 angry 25X1 women resulte in substantial damage to state-operated facilities. 25 Secret 21 February 1986 Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP97-007708000100110001-0 Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP97-007708000100110001-0 Secret Moroccan Phosphate Senior management at the Youssoufia mine maintains the five-week-old strike Strike Fading? by some 5,000 miners is winding down. Mine officials report more than 70 per- cent of the workers have already returned to their jobs-at a rate of 100 to 200 daily-and that the majority are now indifferent to union demands. Union leaders, however, insist the strike is far from over and are continuing to mobilize support in country and abroad. Embassy reporting indicates that, even if management's claims are exaggerated, it now appears unlikely that a settlement involving any kind of union recognition-the primary objective- will emerge. Moreover, although most detained workers will probably be released after the strike ends, few are likely to be reinstated as the union has demanded. With sizable stocks of phosphate on hand, the company can probably outlast even a prolonged strike. Pakistani-Islamic Banking China Controlling Electronics Trade returns competitive and maintain the viability of Islamic banking government could be forced to subsidize domestic banks in order to keep Falling dividends on non-interest-bearing savings accounts pose new problems for Pakistan's Islamic banking system. The US Consulate in Karachi reports that earnings on deposits in domestic banks were a maximum 7.8 percent during June-December 1985 compared with 8.5 percent for the preceding six months. Foreign banks in Pakistan, in contrast, are offering rates of up to 12 percent. The lower domestic bank returns probably reflect higher operating costs and loss of funds to government bonds that pay as much as 15 percent. A sustained dropoff in dividend rates will probably discourage new savings and embarrass Islamabad's efforts to showcase its Islamic banking program. The Beijing's concern over excessive reliance on imported electronics goods and its inability to absorb foreign technology is growing. Reportedly, of 33 imported production Secret 2/ February 1986 1990 only traders subordinate to the Ministry of Electronics Industry may import finished microelectronics goods, and purchases of foreign production lines must include provisions for training and technology transfer. Greater central control over some electronics imports will enable China to purchase more selectively-protecting the domestic industry and curtailing substandard imports. Attention to training personnel to operate and service imported production lines will improve technology absorption and help China to approach its stated goal of self-sufficiency in microelectronics production by lines, only one is partially usable; the rest cannot be used at all. In the future 25X1 25X1 25X1 25X1 Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP97-007708000100110001-0 Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP97-007708000100110001-0 Q Next 2 Page(s) In Document Denied Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP97-007708000100110001-0 l ~ .... .. ... 1... I .. .. .. Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP97-007708000100110001-0 Secret Secret Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP97-007708000100110001-0