INTERNATIONAL ECONOMIC & ENERGY WEEKLY

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Document Number (FOIA) /ESDN (CREST): 
CIA-RDP97-00770R000100180001-3
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RIPPUB
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S
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42
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December 22, 2016
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June 23, 2011
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1
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Publication Date: 
March 28, 1986
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REPORT
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Declassified in Part - Sanitized Copy Approved for Release 2011/12/29: CIA-RDP97-0077OR000100180001-3 Directorate of Intelligence ::~~& eO;~6r he ~1Oe4rnoua-01 International Economic & Energy Weekly DI IEEW 86-013 28 March 1986 Copy 6 6 7 Declassified in Part - Sanitized Copy Approved for Release 2011/12/29: CIA-RDP97-0077OR000100180001-3 Declassified in Part - Sanitized Copy Approved for Release 2011/12/29: CIA-RDP97-0077OR000100180001-3 Declassified in Part - Sanitized Copy Approved for Release 2011/12/29: CIA-RDP97-0077OR000100180001-3 Declassified in Part - Sanitized Copy Approved for Release 2011/12/29: CIA-RDP97-0077OR000100180001-3 International Economic & Energy Weekly iii Synopsis 1 Perspective-OPEC Awaits the Next Saudi Move 3 Iran-Iraq: Economic Situation Worsening 7 Mexico: Charting the Financial Gap 11 Summit Issues: The US Initiative on Debt 15 Summit Issues: The New GATT Round 17 US Sanctions Against Libya: Opportunities for Eastern Europe 21 The USSR and China: Boosting Industrial Use of Computers 25 Briefs Energy International Finance International Trade Global and Regional Developments National Developments 25X1 25X1 25X1 25X1 25X1 LOA-1 25X1 25X1 25X1 25X1 25X1 LJ/\ I ,);v i 25X1 Comments an r' ding this publication are welcome. They may be directed to Directorate of Intelligence Secret DI IEEW 86-013 28 March 1986 25X1 25X1 , Declassified in Part - Sanitized Copy Approved for Release 2011/12/29: CIA-RDP97-0077OR000100180001-3 Declassified in Part - Sanitized Copy Approved for Release 2011/12/29: CIA-RDP97-0077OR000100180001-3 Declassified in Part - Sanitized Copy Approved for Release 2011/12/29: CIA-RDP97-0077OR000100180001-3 I Declassified in Part - Sanitized Copy Approved for Release 2011/12/29: CIA-RDP97-0077OR000100180001-3 Secret International Economic & Energy Weekly Synopsis The inconclusive end to OPEC's meeting in Geneva this week points to a further erosion in oil prices. At this juncture, the Saudis do not appear ready to help reverse the downward price path. Declining oil prices and the falling dollar are compounding the problems facing Iran and Iraq from their ongoing conflict. 25X1 Both debtors and creditors have publicly welcomed the US initiative on LDC debt as a positive first step, but all groups have expressed some reservations. Bix Six leaders will probably not make the launching of a new round of multilateral trade negotiations a major issue at the Tokyo Summit. Disagree- ment on some aspects of the trade talks could arise, however, particularly 1 Perspective-OPEC Awaits the Next Saudi Move 3 Iran-Iraq: Economic Situation Worsening Even though Mexican officials reduced their estimated financial gap from $9 billion in early February to $6 billion last week, we believe there still is a substantial gulf between Mexico's needs and the amount creditors are willing 7 Mexico: Charting the Financial Gap 11 Summit Issues: The US Initiative on Debt 15 Summit Issues: The New GATT Round regarding agriculture, Japanese trade practices, investment, and textiles. 17 US Sanctions Against Libya: Opportunities for Eastern Europe paying many of its East European suppliers. US sanctions against Libya may provide an opportunity for Eastern Europe to earn badly needed hard currency as well as to diversify its sources of oil. Bloc countries almost certainly must weigh carefully Tripoli's past unreliability in iii Secret DI /EEW 86-013 28 March 1986 I Declassified in Part - Sanitized Copy Approved for Release 2011/12/29: CIA-RDP97-0077OR000100180001-3 Declassified in Part - Sanitized Copy Approved for Release 2011/12/29: CIA-RDP97-0077OR000100180001-3 21 The USSR and China: Boosting Industrial Use of Computers The Soviet Union and China have each embarked on ambitious programs to bolster labor productivity, raise product quality, and improve management practices by introducing more low- and intermediate-level computer technol- ogy throughout their economies. In our judgment, China will achieve more rapid short-term progress in the widespread introduction of computers in industrial facilities, but both countries will remain behind the West. Secret iv Declassified in Part - Sanitized Copy Approved for Release 2011/12/29: CIA-RDP97-0077OR000100180001-3 Declassified in Part - Sanitized Copy Approved for Release 2011/12/29: CIA-RDP97-0077OR000100180001-3 International Economic & Energy Weekly Perspective OPEC Awaits the Next Saudi Move 25X1 The inconclusive end to OPEC's meeting in Geneva this week points to a further erosion in oil prices. Without active Saudi cooperation, the organiza- tion will probably be unable to forge an approach to stabilize prices at its next meeting on 15 April. At this juncture the Saudis do not appear ready to help reverse the downward price path. Indeed, Saudi Arabia's strategy for captur- ing a greater market share has been successful so far. Demand is beginning to respond to lower prices and could register its largest annual increase since the late 1970s. Some high-cost oilfields-mainly in the United States-are also beginning to be shut in because of lower prices, a positive development in Riyadh's view. The stakes of the Saudi strategy, however, are high. As Saudi output doubled, and Riyadh boosted sales through netback pricing, revenues for other produc- ers have plummeted. Moreover, the new marketing approach carries a risk of reprisal from Iran and Libya that has caused uneasiness among Saudi Arabia's We believe a combination of objectives is probably behind Riyadh's strategy: increasing oil revenue; forcing producer cooperation on output to restore price stability and maintain current market share; ensuring a growing long-term market for oil; and, to a lesser extent, squeezing Iran economically. Domestic and international conditions cause one objective or another to dominate Saudi oil policy at any given time. For example, we believe that short-term revenue requirements were the driving force prompting Riyadh to abandon its OPEC role as swing producer. Each of these objectives entails different implications for the market and Saudi willingness to compromise within OPEC: ? Oil prices around $15 per barrel probably would satisfy Riyadh's revenue objective, in our view. If maintaining current revenues in the short run is Riyadh's prime objective, we would expect the Saudis to begin soon to take steps to stop the price decline. ? If Saudi Arabia wants to "teach other producers a lesson," it is probably pre- pared to see prices fall as low as $10 per barrel for several months. ? If a desire to ensure a growing long-term market dominates Saudi objectives, Riyadh will probably attempt to keep prices depressed for several years. Although it may not have a specific price objective, we believe the market re- sponse Riyadh would be seeking could be achieved in the $10 to $15 price range. Secret DI IEEW 86-013 28 March 1986 Declassified in Part - Sanitized Copy Approved for Release 2011/12/29: CIA-RDP97-0077OR000100180001-3 Declassified in Part - Sanitized Copy Approved for Release 2011/12/29: CIA-RDP97-0077OR000100180001-3 ? Riyadh almost certainly is pleased that lower prices make financing the war effort more difficult for Iran. A shortfall in oil income, moreover, forces Tehran to cut domestic spending and limit imports of essential consumer goods, which probably would lead to an erosion in popular support for the Khomeini regime. Although Riyadh may believe that it has the capacity to fine-tune the system, because of the complexity of the international oil market the Saudis might not be in a position to control a price collapse. Riyadh, in that event, would be blamed for precipitating a crisis and would face the risk of retaliation from other oil producers such as Iran and Libya, increasing the probability of a disruption of Persian Gulf oil supplies. US vulnerability to future price shocks or supply disruptions is heightened considerably by any Saudi strategy promoting lower prices, regardless of the motive. Low oil prices discourage investment in exploration and development, especially in high-cost regions like the United States. Moreover, lower oil prices will encourage oil consumption and hasten a return to tight market conditions. Because of the high concentration of oil reserves in the volatile Middle East, lower oil prices will accelerate a return to greater dependence on this region. By the early 1990s, even a relatively minor disruption could produce another price shock. Since the Saudis hold the largest oil reserves in the area, Western dependence on Saudi Arabia as a major oil supplier would be increased, and Riyadh's political and economic clout would be enhanced. 25X1 25X1 Declassified in Part - Sanitized Copy Approved for Release 2011/12/29: CIA-RDP97-0077OR000100180001-3 I Declassified in Part - Sanitized Copy Approved for Release 2011/12/29: CIA-RDP97-00770R000100180001-3 Secret Iran-Iraq: Economic Situation Worsening Declining oil prices and the falling dollar are compounding the problems facing Iran and Iraq from their ongoing conflict. Severe economic hard- ships in the months ahead will almost certainly increase the level of popular discontent in both countries. Neither Tehran nor Baghdad face eco- nomic collapse, however, and it would take several months before sustained economic strains would pose a serious threat to Iraqi President Saddam Husayn's grip on power or cause Iran to consider adopting a less aggressive stance on the war.F Iraqi Economic Outlook Because of the sharp decline in oil prices, the Iraqi people face a severe decline in living standards in 1986. Assuming a $15 per barrel average oil price, we estimate Iraqi oil revenues will fall to about $8.5 billion this year from $11.4 billion in 1985. More- over, the lower value of the US dollar increases the real impact because oil is priced in dollars, whereas most Iraqi imports and debts are valued in other currencies. If the dollar stabilizes at its current level, we estimate the impact would be equivalent to an additional 5-percent decline in revenues. In addition, oil exports, which represent 97 percent of foreign exchange earnings, are already at capacity. Iraq is likely to reschedule approximately $1.5 billion in debt payments due this year, but is unlikely to obtain additional credit from its trade partners. We estimate Baghdad owes non-Arab creditors $9-10 billion. Western banks were reluc- tant to increase their exposure in Iraq even before the recent drop in oil prices and Iran's capture of Al Faw. The Embassy reports Baghdad also failed to obtain additional credits for imports of consumer goods from East European countries. Baghdad can probably count on continued large- scale financial support from Saudi Arabia and Iraq: Current Account, Billion US $ 1984-86 10.4 11.4 8.5 8.5 Net services and private transfers -2.8 -3.1 -3.4 - 3.4 a Projection based on an average oil price of $15 per barrel, oil exports averaging 1.55 million b/d, and a 25-percent reduction in imports. b Projection based on an average oil price of $15 per barrel, oil exports averaging 1.55 million b/d, and maintaining imports at the 1985 level. Kuwait, especially while Iran is doing well militari- ly. Riyadh and Kuwait 25X1 have renewed an agreement to sell oil on Iraq's behalf, which brought in about $2 billion in 1985. In addition, Baghdad has probably received large cash infusions. Even with additional Arab aid, 25X1 however, Baghdad cannot avoid substantial auster- ity measures. New economic realities will force the Ba'thist regime to virtually abandon the domestic spending policies it has so far used to shore up political support. We estimate Iraq will need to cut imports by 25 to 30 percent. Most of the cuts will fall on re- maining development projects and goods for domes- tic industry, creating shortages of nonessential con- sumer goods and fueling inflation. The US 25X1 Secret DI IEEW 86-0/3 28 March 1986 Declassified in Part - Sanitized Copy Approved for Release 2011/12/29: CIA-RDP97-00770R000100180001-3 Declassified in Part - Sanitized Copy Approved for Release 2011/12/29: CIA-RDP97-00770R000100180001-3 Secret Embassy already reports shortages of important domestically produced goods, and we foresee fur- ther reductions in the perquisites of military offi- cers and public officials and in benefits to families Iran: Current Account, Billion US $ 1984-86 of war dead. Heightened austerity will contribute to popular discontent and increase the likelihood of a coup within the Bath party. In particular, loss of perqui- sites and power as a result of lower oil revenues could encourage government officials and military officers-already upset by mismanagement of the war-to seek Saddam Husayn's removal. The greatest threat over the next several months, how- ever, will be from Iran. A further deep incursion into Iraqi territory could push the army to stage a coup. Iran has more options than Iraq in dealing with falling oil prices but lacks deep-pocketed allies like the Saudis. Oil accounts for only one-third of Iran's GDP compared with two-thirds for Iraq. Moreover, Tehran retains some $3-4 billion in liquid foreign exchange reserves and has negligible long-term foreign debts. Net services and -3.0 -2.8 -2.7 -2.7 private transfers a Projection based on an average oil price of $15 per barrel, oil exports averaging 1.66 million b/d, and a 20-percent reduction in imports. b Projection based on an average oil price of $15 per barrel, oil exports averaging 1.66 million b/d, and maintaining imports at the 1985 level. Iran could manage its finances with such a cut by accepting foreign credits, which it has so far avoid- ed on ideological grounds. Tehran will probably avoid running down foreign exchange assets be- cause it regards these as a cushion against an extreme emergency such as a complete cutoff of its Tehran's oil policy remains something of a wild card. Iran has the capacity to raise oil exports by up to 60 percent if Iraq does not destroy key oil facilities. Tehran has so far been unwilling to risk intensifying the current price war, in large part because the clerical regime believes that low oil prices only benefit the West. Nevertheless, Teh- ran's willingness to abide by its OPEC quota may fade if oil prices remain depressed over a long period. At the recently concluded OPEC meeting, Iran's Oil Minister threatened to greatly increase exports if OPEC cannot reach agreement on cut- ting production. Unless Iran increases oil exports, we estimate $15 a barrel oil and a weakened dollar would cause about a 35- to 40-percent decline in real forei n exchange earnings in 1986. Iran expects to trim imports by at least 20 percent this year following a 30-percent reduction last year. oil exports The war and slack oil market have caused Iran increasing economic distress, especially over the past year, and growing resistance to calls for ever greater sacrifices. Food and military imports are likely to be spared in the next few months, leaving the full burden of cuts on the long-suffering industrial and construction sec- tors. Higher unemployment and inflation seem inevitable. Severe shortages of important consumer goods such as medicines and meat already exist, and most people must turn to the high-priced black market for their needs. On the plus side, domestic agricultural production is up and food shortages are unlikely. The government is also giving freer rein to the still important private sector, which should provide some cushion against necessary reductions in imports. 25X1 25X1 25X1 25X1 25X1 Declassified in Part - Sanitized Copy Approved for Release 2011/12/29: CIA-RDP97-00770R000100180001-3 Declassified in Part - Sanitized Copy Approved for Release 2011/12/29: CIA-RDP97-00770R000100180001-3 Recent military successes harden Tehran's will to fight on and help temper popular reaction to great- er economic hardships. Moreover, the Islamic Re- public retains considerable popular support. Eco- nomic problems are likely to produce some unrest, although not enough to pose a serious threat to the regime over the next 12 months unless combined with a major setback in the war. The need for even tougher austerity measures, however, may eventu- ally convince Tehran that it must scale down its war effort to preserve the Islamic Republic and guarantee a tolerable level of long-run economic development. Impact on the War Financial constraints will not prevent either side from continuing the war in the short term. Iran's war effort is "labor-intensive," and the high level of Arab aid to Iraq almost guarantees that neither nation will find itself critically short of military supplies in the next several months. Over the longer term, however, Iran will probably find it difficult to maintain the scale of its military initiatives, and Iraq will need to trim plans to modernize its forces. Both combatants presumably are reviewing their military options in light of current economic pres- sures. Iraq may mount more aggressive attacks on Iran's economic infrastructure. We believe Iraq has the capability to bring much of Iran's economy to a standstill by destroying its electrical system and oil refineries. If Baghdad maintains pressure on eco- nomic targets for a few months, Tehran might be compelled to accept a de facto truce in the war. Iran has warned Saudi Arabia and Kuwait to bolster the price of oil by restraining production and to discontinue their massive economic support for Iraq. Iran already appears to have stepped up attacks on tankers in the Gulf and will probably take stronger action-including terrorist acts or tanker seizures in the Gulf-if oil prices remain depressed. 25X1 25X1 Declassified in Part - Sanitized Copy Approved for Release 2011/12/29: CIA-RDP97-00770R000100180001-3 Declassified in Part - Sanitized Copy Approved for Release 2011/12/29: CIA-RDP97-00770R000100180001-3 Declassified in Part - Sanitized Copy Approved for Release 2011/12/29: CIA-RDP97-0077OR000100180001-3 Declassified in Part - Sanitized Copy Approved for Release 2011/12/29: CIA-RDP97-0077OR000100180001-3 Mexico: Charting the Financial Gap Even though Mexican officials reduced their esti- mated financial gap from $9 billion in early Febru- ary to $6 billion last week, we believe there still is a substantial gulf between Mexico's needs and the amount creditors are willing to offer. The de la Madrid administration has announced it will seek $2.5 billion in new commercial bank lending and another $1.5 billion in funding from multilateral lending institutions. Mexican negotiators publicly claim the country will cover the remaining $2 billion through Paris Club reschedulings and bolstered nonoil exports, foreign commercial banks plan to offer only $2.5 billion contingent on an agreement with the IMF and structural adjustment legislation. Perhaps more important, they have agreed to reject any Mexican request for interest payment concessions or capitalization. In addition to lost revenues, the banks fear a spillover of such concessions to other debtors. Moreover, banks do not want to appear to be rewarding Mexico for the country's poor eco- nomic policies in 1985. 1986 Financing Gap-How Big? From the perspective of foreign creditors and Washington, the first step in finding a solution to Mexico's financial problem lies in determining the true magnitude of the country's needs. To take a closer look at these needs, we have charted financ- ing gaps under three scenarios. Sharing the Burden. In our view, the most probable outcome will be one of moderate sacrifice on the part of Mexico, with some sacrifice on the part of creditors. In this case, we project that GDP would decline about 3 percent and inflation would hit 80 to 85 percent. Under this scenario, Mexican oil prices stabilize at $15 per barrel and oil exports average 1.3 million b/d. In addition, LIBOR-the rate to which most Mexicans' loans are pegged- stays at about 8 percent. The nearly 50-percent fall in petroleum revenues projected for 1986 as a result of the price decline-- about $6.5 billion-will be partially offset by at least a 20-percent increase in nonoil exports, made possible by stagnant domestic demand and a favor- able exchange rate policy. Significant increases in maquiladora activity (assembly plants) fueled by aggressive support from Mexico City, the growing 25X1 popularity of the program with US businessmen, 25X1 and the higher expected level of US economic growth this year also could help rescue the current account. In our view, the country alsd can increase its tourism receipts 25 percent if it modestly deval- ues the peso and takes measures to allay tourists' safety concerns. Even though Mexico City soon will begin negotia- tions to join the GATT, import barriers probably will be retained through 1986. These restrictions, combined with a modest peso devaluation and depressed domestic demand, will keep imports well below 1985 levels. In addition, the country will save about $400 million from interest overpayments after last year's restructuring and perhaps that much again from lower priced imports of petroleum derivatives and petrochemicals. Therefore, we ex- pect Mexico's import bill to decline by about $1.2 billion from the 1985 level. Even if de la Madrid is able to rebuild some confidence in the Mexican economy, the likelihood of depressed domestic in- terest rates and ineffectiveness of government at- tempts to repatriate capital will probably mean that capital flight will be reduced to $2.0 billion at best. Finally, we assume that the IMF will require as part of any 1986 financial package that the country raise foreign exchange reserves. Secret DI IEEW 86-013 28 March 1986 Declassified in Part - Sanitized Copy Approved for Release 2011/12/29: CIA-RDP97-0077OR000100180001-3 Declassified in Part - Sanitized Copy Approved for Release 2011/12/29: CIA-RDP97-0077OR000100180001-3 Mexico: The Potential 1986 Financial Gap Most No $10 per Likely Adjust- Barrel Case ment Oil Price Current Account 5,324 3,969 -427 -2,497 -3,797 -3,370 Trade balance 13,762 12,800 8,235 4,318 3,168 3,445 22,312 24,054 21,835 16,718 _16,268 14,745 Oil and products 16,017 16,602 14,675 8,018 8,018 5,445 Maquila 818 1,115 1,300 1,5001,450 1,500 Other 5,477 6,297 5,860 7,200 6,800 7,800 8,551 11,254 13,600 12,400 13,100 11,300 4,307 4,790 4,950 4,750 4,950 4,500 Private sector 4,244 6,465 8,650 7,650 8,150 6,800 Services balance -8,437 -8,831 -8,662 -6,815 -6,965 -6,815 Of which: Interest payments 10,198 11,856 10,047 9,000 9,000 9,000 Tourism 1,183 1,307 1,200 1,500 1,350 1,500 Capital account -1,106 -1,576 -1,931 4,998 6,798 5,870 Public sector 743 -207 519 7,178 8,978 8,050 Priva te sector -1,849 -1,369 -2,450 -2,180 -2,180 -2,180 Change i n reserves 3,301 2,241 -3,019 500 500 0 Errors an d omissions and capital flight 917 151 3,000 2,000 2,500 2,500 Estimated. n Projected. Including borrowing to finance the current account deficit, net private-sector borrowing needs, capital flight, and reserve changes. In our estimation, Mexico's financing needs would earthquakes and another $250 million due this be about $7 billion under this scenario. As things year. We do not believe banks will grant Mexico now stand, the best Mexico City can hope for from relief from interest payments or reduce their spread commercial banks is a rescheduling of $1.2 billion over LIBOR. The de la Madrid administration in principal payments: $950 million originally due probably can negotiate a rescheduling of $1 billion in 1985 but deferred until now because of last fall's Secret 8 Declassified in Part - Sanitized Copy Approved for Release 2011/12/29: CIA-RDP97-0077OR000100180001-3 Declassified in Part - Sanitized Copy Approved for Release 2011/12/29: CIA-RDP97-00770R000100180001-3 in official amortization payments through the Paris Club. If new lending is limited to $4.1 billion-$2.5 billion from commercial banks and $1.6 from other sources-the country would face a financing short- fall of approximately $900 million, which could be managed through some combination of reserve drawdowns, additional import cuts, or appeals for foreign financing. Limited Mexican Sacrifice. A less likely scenario could develop in which de la Madrid believes that, because of political constraints, he is unable to significantly improve the country's external bal- ances through greater austerity. Lack of adjust- ment measures would limit the fall in real GDP to 1 or 2 percent, but the deterioration of Mexico's current account is substantial. In this case, we assume oil still is selling at $15 per barrel and that Mexico is exporting 1.3 million b/d. Once again, we assume LIBOR is at 8 percent. Unlike the first scenario, however, Mexico City does relatively little to offset lower oil prices. Even with a less ambitious exchange rate policy, we assume the $6.5 billion loss in petroleum revenues is partially offset by an increase in nonoil exports of about 15 percent-about $1 billion, mainly the result of depressed domestic demand-and a 12- percent rise in tourism receipts. Growth of the maquiladora industry would be constrained by a lack of infrastructure investment and the politically motivated desire to rein in northern Mexican busi- nessmen. Lack of an aggressive exchange rate policy allows for only a modest saving in imports. Slow domestic demand reduces private-sector imports by $500 million, but the government's import bill is un- changed. Given the bleak economic future implied in this scenario, we assume capital flight reaches $2.5 billion. As before, we anticipate an IMF- recommended increase in foreign exchange re- Under this scenario, we estimate Mexico would need $9 billion in external financing. Despite Mexi- co's unwillingness to take tough adjustment mea- sures, we believe the country still can count on commercial banks to roll over both the $950 million principal payment from last year and the $250 million payment this year. The banks probably have already decided to reschedule these obliga- tions to maintain the flow of interest payments. Similarly, a $1 billion Paris Club rescheduling is still likely. However, in light of the tough and united stance bankers now appear to be taking, we would expect little in the way of new lending or concessions. At most, we believe foreign lending from all sources would total $2.6 billion. Without some relief from its creditors, the country almost certainly would be forced to withhold interest payments to cover the resulting $4 billion financing gap. $10 Oil Prices. In the third scenario, the average price for Mexican oil falls to $10 per barrel and export volume of 1.3 million b/d is maintained. Again, LIBOR is at 8 percent. We believe the dramatic fall in revenues would prompt Mexico to adopt aggressive export promotion programs and 25X1 fairly strict import controls. At the same time, the country's creditors probably would be under even greater pressure to rethink their positions and adopt a concessionary stance. We estimate that the $8.5 billion loss in crude oil revenues could be partially offset by a $2 billion increase in nonoil exports if Mexico City imple- mented a 20-percent devaluation and loosened some foreign investment laws. In addition, tourism receipts could be expected to climb 25 percent as foreigners took advantage of the favorable peso/dollar rate. The devaluation, import control, and lack of Mexi- can purchasing power also would save the country some $2 billion. We believe that nearly all of the savings would come from the private sector, which also carried the weight of adjustment when imports Action to bolster the country's external accounts would not come without high domestic costs, how- ever. We estimate GDP would plunge 4 to 6 percent in real terms and inflation almost certainly 25X1 2oA-i I Declassified in Part - Sanitized Copy Approved for Release 2011/12/29: CIA-RDP97-00770R000100180001-3 Declassified in Part - Sanitized Copy Approved for Release 2011/12/29: CIA-RDP97-0077OR000100180001-3 would approach triple digits if Mexico City imple- mented these policies. These measures would be politically costly as well, especially in the north where trade is relatively more important and politi- cal dissatisfaction is highest. In this case, we estimate Mexico's borrowing needs would be slightly over $8 billion. We believe that Mexico's creditors, faced with the realities of $10 per barrel oil prices and encouraged by the de la Madrid administration's willingness to adjust, would be willing to grant some interest payment relief, in addition to rescheduling $1.2 billion in principal payments due this year. Thus, Mexico City might receive up to $6 billion in new lending, and an additional $1 billion in interest payment concessions. Despite this relief, however, we believe Mexico still would come up $1.75 billion short, forcing a further drawdown in reserves and interest payment arrearages. Secret 10 25X1 25X1 Declassified in Part - Sanitized Copy Approved for Release 2011/12/29: CIA-RDP97-0077OR000100180001-3 I Declassified in Part - Sanitized Copy Approved for Release 2011/12/29: CIA-RDP97-0077OR000100180001-3 Secret Summit Issues: The US Initiative on Debt Both debtors and creditors have publicly welcomed the US initiative on global debt as a positive first step, but all groups have expressed some reserva- tions. Big Six leaders consider the US initiative a good starting point for discussing debt and will probably make it a prominent issue at the Tokyo Summit. They might stress, however, that the approach needs rethinking, particularly in light of the impact of falling oil prices on oil-producing countries. Major debtor countries, meanwhile, are reluctant to undertake the substantial policy re- forms that the approach entails, and some LDC leaders feel full subscription to the US plan is politically unpalatable at this time. Both debtor countries and commercial banks have publicly ex- pressed some concerns with the US approach and responded with their own recommendations. Debtors' Response Summit participants will have an opportunity to gauge debtor attitudes at the IMF/IBRD commit- tee meetings in April. The 11 Latin American nations of the Cartagena group' already have issued a set of "emergency" measures for negotia- tions on debt and growth that go beyond US recommendations. Meeting in Montevideo, Uru- guay, on 16-17 December 1985, the foreign and finance ministers of the Cartagena group presented counterproposals to the US approach and stated in a joint declaration that structural problems in industrial countries-particularly high real interest rates-and falling terms of trade are the major obstacles to solving their debt problem. The minis- ters claim that living standards in Latin America have slipped to levels of a decade ago, and they argue that their countries cannot wait for improve- ments in the world economy. 'The Cartagena group consists of Argentina, Bolivia, Brazil, Chile, Colombia, Dominican Republic, Ecuador, Mexico, Peru, Uruguay, US Treasury Secretary James Baker proposed a new program for sustained growth in debtor countries on 8 October 1985 at the joint IMF/World Bank meeting in Seoul, South Korea: ? Debtor countries are to adopt market-oriented poli- cies to promote economic growth, hold down infla- tion, and shore up their balance of payments. These policies are aimed at improving the investment climate in these countries by allowing a larger role for private companies, asserting financial discipline over public enterprises, and eliminating a variety of economic controls. ? Lending by the World Bank and other multilateral development banks to countries that adopt such reforms would increase $9 billion over the next three years. The IMF also would play a central role in assisting and monitoring the adjustment process in debtor countries. The initiative foresees in- creased coordination between the World Bank and IMF to ensure consistent policy advice. ? Debtor countries that undertook market-oriented adjustment also would be eligible for $20 billion in new lending by commercial banks during the next three years. Secretary Baker has suggested that US banks put up $7 billion, with West European and Japanese banks providing the other $13 billion. Meanwhile, the group of 24 2 (G-24) met on 4-6 March in Buenos Aires at the behest of Argentina ' The G-24, formed at the 1972 Lima meeting of the G-77 to represent the interests of the Third World in international mone- tary affairs, consists of eight finance ministers each from Africa, Secret DI IEEW 86-013 28 March 1986 Declassified in Part - Sanitized Copy Approved for Release 2011/12/29: CIA-RDP97-0077OR000100180001-3 Declassified in Part - Sanitized Copy Approved for Release 2011/12/29: CIA-RDP97-0077OR000100180001-3 as the pro tempore chairman to try to reach a joint position on debt and related issues for the 9-10 April meeting of the IMF's Interim Committee. The G-24 report states that the US initiative contains some positive elements, such as the recog- nition that a lasting solution to the global debt problem requires sustained economic growth. How- ever, the finance ministers believe the US initiative should be adapted to the needs of each country, providing resources necessary to offset the fall in the price of oil products and raw materials as well as the capital inflows necessary to achieve sus- tained economic growth. They declare that the repayment capacity of the debtors will improve only if the interest rates paid on their external debts are reduced to levels below the present market. The declarations issued by the Cartagena group and the G-24 are part of the effort of Latin debtors to gain concessions from their international credi- tors. Latin leaders must try to appease growing domestic popular sentiment for a tougher stand with creditors. Moreover, they want Washington to view their debt problem as at least as important as issues in Central America. Finally, these countries are reluctant to undertake the substantial policy reforms that the US approach on debt entails because their leaders feel the reforms are politically unacceptable. Creditor Banks and Western Government Responses Private bankers and government officials in West- ern Europe and Japan remain skeptical about the US initiative despite their public support. The international banking community welcomed the initiative as a new and promising approach, but subsequently bankers have hedged their approval with several conditions. Some bankers now believe the amount of new lending envisioned in the initia- tive will need to be raised in view of the deteriora- tion in oil producers' export earnings. West Europe- an bankers, in particular, want strong creditor government action before they make any commit- ments. British bankers, for instance, have said that they will not move forward on the US initiative The Cartagena Group Proposals on Debt and Growth The Cartagena group presented nine items for negoti- ations on debt and growth at the Montevideo meeting including: ? Western action to return real interest rates to historic levels and examination of mechanisms to ease the debt service burden. ? Increased capital flows to the region and a separa- tion of old debt from new debt, with future credit flows getting lower rates. ? Increases in commercial bank lending to at least match world inflation. ? A limitation on debt payments, linked either to economic growth or to export earnings. ? A 20 percent annual increase in multilateral devel- opment lending for the next three years. ? Arrangement of multiyear restructuring and inter- est capitalization through the Paris Club, without creditors suspending new export credits or requiring an IMF-supported adjustment program. ? Enlarging and broadening the coverage of the IMF's compensatory financing facility to help offset the impact of deteriorating terms of trade, natural disasters, and increased interest rates. ? An easing of conditionality required by creditors for new loans to allow for economic growth. ? Elimination of industrial country protectionist measures. In addition to these proposals, the Cartagena Steer- ing Committee, which met on 27-28 February in Punta del Este, Uruguay, to respond to the "emergen- cy" situation created by the drop in oil prices, voiced full support for Cartagena members' efforts to modify existing debt agreements, especially by renegotiating interest rates. without a go-ahead from the Bank of England. Senior managers of the 12 largest West German commercial banks claim that the initiative places too much of the burden on banks and have called for greater tax write offs on bad loans and more Declassified in Part - Sanitized Copy Approved for Release 2011/12/29: CIA-RDP97-0077OR000100180001-3 i Declassified in Part - Sanitized Copy Approved for Release 2011/12/29: CIA-RDP97-0077OR000100180001-3 Secret Commercial Bank Exposure to 15 Troubled Debtorsa ? Italian officials see no alternative to increased lending while the Canadians believe they have a lot at stake because of Canadian exposure in Latin America. United States 35.0 EC Finance Ministers will try to formulate a coordinated position on the US initiative when they ` Data are for December 1984. The 15 countries are Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Ivory Coast, Mexico, Morocco, Nigeria, Peru, Philippines, Uruguay, Venezuela, and Yugoslavia. n Venezuelan debt to Japanese banks not available. export credit guarantees. Governments' reaction has been generally favorable: ? Japan's Finance Ministry already has called on its banks to contribute $3 billion and advocates implementing the initiative on a case-by-case basis. ? French Finance Minister Beregovoy has praised the US initiative as a "big step forward," and French officials are especially pleased with its proposals for a cooperative creditor strategy and an enhanced role for the World Bank. meet in the Netherlands on 4-6 April. Even if bankers and government officials go along with the US concept, they are likely to insist that US banks take on a larger share of the lending. many West Europe- an banks are not willing to put up substantial new funds for debtor countries such as Mexico. Despite the exposure of their banks, the governments and private banks in Western Europe and Japan believe the burden of dealing with the problems falls on Washington because they view Mexico primarily as a US responsibility. Although they could suffer 25X1 financial losses, they are in much better shape than most major US banks because of greater reserves against their troubled loans and more favorable writeoffs for bad debts. Implementation of US Strategy Some financial observers are concerned that if the US approach is not soon translated into a workable plan for major debtors such as Mexico, Argentina, and the Philippines, the initiative may wither on the vine. Thus far, however, most debtors have displayed little commitment to economic policy reforms. Creditor banks also want to see the US concept turned into reality but will be hesitant to become the sole source of additional funds. Bankers ? British officials agree with the objectives and concept of the approach but believe that "sub- stantial" changes are needed to get both lenders and borrowers alike on board. 1 Declassified in Part - Sanitized Copy Approved for Release 2011/12/29: CIA-RDP97-0077OR000100180001-3 Declassified in Part - Sanitized Copy Approved for Release 2011/12/29: CIA-RDP97-0077OR000100180001-3 believe that more leadership is required from West- ern governments to implement the US approach. Because of the serious global debt situation, Big Six leaders undoubtedly will be eager to discuss the international debt situation at the Tokyo Summit. The United Kingdom, for example, regards it as a "high stakes" issue because of London's status as a key financial center. West German Finance Minis- ter Stoltenberg has suggested making it the main theme of the summit. The Big Six countries are likely to declare publicly support for the US initia- tive; they are unlikely, however, to agree to boost export credits substantially or make the regulatory changes that their bankers want. Secret 14 25X1 25X1 Declassified in Part - Sanitized Copy Approved for Release 2011/12/29: CIA-RDP97-0077OR000100180001-3 Declassified in Part - Sanitized Copy Approved for Release 2011/12/29: CIA-RDP97-0077OR000100180001-3 Summit Issues: The New GATT Round Big Six leaders will probably not make the launch- ing of a new round of multilateral trade negotia- tions a major issue at the Tokyo Summit. Disagree- ment on some aspects of the trade talks could arise, however, particularly regarding agriculture, Japanese trade practices, investment, and textiles. Non-US participants will probably seek a general endorsement for the new round in order to keep preparations on track and thus help avoid fueling US protectionist pressures. Japan will probably try to use statements of support for the new round to help deflect attention from its contentious bilateral trade issues All summit partners have expressed general sup- port for the launching of a new trade round at the GATT Ministerial in September. The Big Six have also endorsed the inclusion of trade in services in the GATT negotiations, a key US initiative. None- theless, many major issues for the new round's agenda are still unresolved A principal source of contention is the inclusion of new trade issues. Several LDCs, led by India and Brazil, have been arguing that the GATT is not the proper forum for negotiating rules to promote liberalized trade in services, enforcement of intel- lectual property rights, and less restricted foreign investment-key new round initiatives of the United States. A longstanding demand by many LDCs-including newly industrialized countries (NICs)-is either that they be exempt from new GATT agreements or that the agreements be ap- plied to LDCs gradually, given their special need to protect domestic markets. Many LDCs are also insisting that industrial country reduction of trade barriers against traditional LDC exports, such as agricultural products and textiles, be accomplished as "confidence building" measures before a new round begins. The West Europeans, however, are likely to balk at LDC proposals-particularly on textiles-which threaten to increase European un- employment. Moreover, disagreement also exists among the industrialized countries on a number of these issues. Agriculture has the potential to be the most conten- tious GATT-related issue at the summit. The EC has repeatedly warned that proposals aimed at attacking its Common Agricultural Policy (CAP) 25X1 are not negotiable. France, the most zealous de- fender of the CAP, believes that any GATT discus- sion of agriculture will degenerate into an attack on EC policy. The conservative victory in last week's French parliamentary elections, moreover, proba- bly presages an even tougher stance by Paris. French President Mitterrand cited this concern in opposing the Bonn Summit's declaration of support for the new round last year. Jacques Chirac, the new prime minister, has expressed opposition to a new trade round unless EC-US differences on agriculture are resolved, according to Embassy reporting. Among other summit countries: ? We believe that Italy would support French opposition to agriculture's inclusion in the GATT. ? The United Kingdom, on the other hand, has stated that agriculture is a priority issue for the trade round. ? West Germany, while backing London, is unlikely to press the issue in Tokyo, since its farmers are heavily dependent on CAP subsidies and Chan- cellor Kohl probably is unwilling to antagonize the French over this issue. Secret DI IEEW 86-0/3 28 March 1986 Declassified in Part - Sanitized Copy Approved for Release 2011/12/29: CIA-RDP97-0077OR000100180001-3 Declassified in Part - Sanitized Copy Approved for Release 2011/12/29: CIA-RDP97-00770R000100180001-3 Secret ? Canada, although unlikely to initiate discussion of agriculture issues, is strongly opposed to EC agricultural subsidies and to recently enacted US farm legislation Japanese trade restrictions are likely to become the target of a West European attack. The EC has long viewed Japan as the most notorious unfair player within the GATT, and last week proposed discuss- ing that problem formally in the new round. Al- though Japan will attempt to steer summit deliber- ations away from the market access issue, the Europeans will probably attempt to use Tokyo's desire as summit host to avoid major blowups as a means to gain Japanese concessions in this area. Textiles has the potential to become a problem issue. Although EC trade ministers recently agreed that current negotiations to renew the Multifiber Arrangement (MFA) should be followed by efforts in the new round to liberalize trade in textiles and apparel trade, individual EC members are probably still divided on the question. France and Italy, in fact, are seeking a more restrictive extension of the MFA to protect their textile and apparel industries from LDC exports. Bonn and London, in contrast, believe the industrial countries can solidify LDC support for the trade round by phasing out the MFA and including textiles in the GATT negotia- tions. Canada will probably oppose folding MFA into the GATT. Trade-related investment could also generate dis- agreement at the summit. London, Bonn, and Rome believe that the current US position on including investment in the new round is too broad and is being pressed too hard. In their view, according to US Embassy reporting, the United States risks provoking strong LDC resistance not only to including investment but also to other GATT priorities, such as services. The three coun- tries believe the LDCs will particularly oppose investment if topics such as expropriation are in- cluded. They prefer to restrict GATT negotiations to areas the LDCs will probably find less sensitive, such as investment incentives, export performance requirements, and local content. Japanese officials similarly are hesitant about making the discussion of investment too broad, according to Embassy reporting. Intellectual property rights may receive only luke- warm response from several non-US participants. According to US Embassy reporting, the United Kingdom, West Germany, and Italy view the issue with little enthusiasm. Bonn, for example, believes that pushing too hard on copyright violations and counterfeit goods, in which LDCs are major of- fenders, could reduce LDC support for the new round. Services will probably not prompt serious disagree- ment at the summit. Once the new round begins, considerable disagreement will probably emerge regarding specific service sectors to be included and the means for negotiating service trade rules. Beyond the Summit Although the summit almost certainly will support the launching of the new round, substantial dis- agreement on key topics has the potential for slowing the progress of the new round. Open dis- cord among the summit participants-such as an EC attack on Japanese trade restrictions-would diminish developed country unity on the new round and could cause problems for US efforts to include some items on the new round's agenda. 25X1 25X1 25X1 25X1 Declassified in Part - Sanitized Copy Approved for Release 2011/12/29: CIA-RDP97-00770R000100180001-3 i Declassified in Part - Sanitized Copy Approved for Release 2011/12/29: CIA-RDP97-0077OR000100180001-3 Secret US Sanctions Against Libya: Opportunities for Eastern Europe US sanctions against Libya may provide an oppor- tunity for Eastern Europe to earn badly needed hard currency as well as to diversify its sources of oil. Several East European countries-particularly Bulgaria, Romania, and Hungary-may seek to supply Libya with technology and petroleum drill- ing equipment previously supplied by US firms. Bloc countries almost certainly must weigh careful- ly Tripoli's past unreliability in paying many of its East European suppliers. Moreover, Eastern Euro- pe's potential to capitalize on the sanctions depends on West European competition because Libya, for both economic and political reasons, is likely to view the Bloc as a second choice. Turning Oil Into Hard Currency A substantial portion of the Libyan crude oil obtained in barter deals is refined and reexported to the West for hard currency.' From 1980 to 1985 the region earned $4-7 billion in hard currency annually from reexports of oil. Over the past decade Libya has provided 13 to 15 percent of Eastern Europe's non-Soviet oil imports. In 1983 Bulgaria and Hungary relied the most on Libyan oil, importing over 75 percent of their non-Soviet oil from Libya. Poland (60 percent of non-Soviet oil imports), Yugoslavia (30 percent), and Romania (10 percent) also counted on Libyan oil. According to the US Embassy in Prague, Czechoslovakia has received substantial amounts of Libyan oil, which it has resold on the spot market, although neither country reports these deals. East Germany imports little, if any, oil from Libya. Opportunities for Expanded Ties East European firms potentially could fill some of the gaps left as US firms comply with the sanc- 'The USSR supplies about 70 percent of Eastern Europe's oil imports and Libya, along with Iran and Iraq, supplies the rest. Although Libya has played a relatively small role in Eastern Europe's foreign trade, the growth in Eastern Europe's exports to Libya since 1980- almost 2 percent annually-exceeds the growth of the region's exports to developing countries as a whole. In 1984 Libya purchased 10 percent of the region's hard currency exports to developing coun- tries. Hungary and Bulgaria have seen the most rapid growth of exports to Libya; East Germany has experienced a decline in sales. Libya provides an outlet for East European arms and manufactured goods, many of which are not competitive in Western markets. Czechoslovakia, Yugoslavia, and Bulgaria have been Libya's major East European arms suppliers. In 1983 and 1984 East European arms deliveries to Libya totaled $480 million and $350 million, respectively. East- ern Europe also supplies services and equipment for oil drilling and refining and constructs large- scale projects such as refineries, factories, power plants, irrigation systems, agricultural facilities, housing, roads, and some military-related projects. Because of the scarcity of skilled professionals and need for construction crews, Tripoli employs a sizable number of East European guest workers and pays their salaries in hard currency. An estimated 50,000 East Europeans-including 800 military advisers-currently work in Libya. tions. Bulgaria and Romania already have an es- tablished presence in Libya as suppliers of petro- leum drilling and exploration equipment and tech- nicians. These countries probably could provide additional equipment and services of sufficient Secret DI JEEW 86-013 28 March 1986 25X1 25X1 25X1 25X1 I Declassified in Part - Sanitized Copy Approved for Release 2011/12/29: CIA-RDP97-0077OR000100180001-3 Declassified in Part - Sanitized Copy Approved for Release 2011/12/29: CIA-RDP97-00770R000100180001-3 quality and quantity to maintain Libyan oil produc- tion and exports. Tripoli is already hiring Bulgarian crews to replace US crews in conducting seismic studies and is likely to bring in more Bulgarian Incentives for East European countries to replace US firms in Libya include: ? Hard currency earnings. Increased sales of equip- ment and services to Libya, specifically in the petroleum sector, could generate hard currency- either by direct payment or via reexport of more Libyan oil. Goods and services previously sup- plied by US firms totaled about $600-700 million annually. Because of the soft oil market, Eastern Europe may have good bargaining leverage in striking barter deals with Libya. These same market conditions, however, limit prospects for reexporting more of this oil without putting addi- tional pressure on prices. Still, even if Eastern Europe marketed just one-fourth of the Libyan oil formerly sold by US companies and prices plunged to $10 per barrel, the region could earn annually nearly $200 million in hard currency. ? Diversification of Oil Sources. By diversifying its energy sources, Eastern Europe lowers the risk of domestic energy shortfalls-a particular concern if the Soviets decrease their oil exports to the region. The USSR might choose to redirect some oil exports to the West to generate hard currency in the wake of falling energy prices or retain more oil at home to balance supplies with growing domestic demand. In addition, Eastern Europe may look increasingly to Third World oil produc- ers such as Libya because the price for Soviet oil-while payable in East European goods-is now almost twice the world price. Eastern Europe is probably approaching increased Libyan commercial ties with caution. In recent Eastern Europe: Trade With Libya, 1984 Estimated. According to official East European trade statistics, Czechoslovakian and Polish imports of Libyan goods are negligible. c Including some oil imports on Soviet accounts. years several Bloc countries have encountered diffi- culty in receiving payment for exports-including military hardware-and construction services. Fall- ing oil prices and revenues have worsened Tripoli's cash flow problems. Uncertainty about Libya's creditworthiness has probably limited trade be- tween Tripoli and the Bloc. 25X1 25X1 Declassified in Part - Sanitized Copy Approved for Release 2011/12/29: CIA-RDP97-00770R000100180001-3 i Declassified in Part - Sanitized Copy Approved for Release 2011/12/29: CIA-RDP97-0077OR000100180001-3 Secret Libya's cash shortage has forced some of its East European creditors to accept payment in oil, and even then Tripoli has been less than reliable in making deliveries. some East European firms have had considerable difficulty getting Libya to deliver oil to settle debts. Recently, Romania blamed its inability to meet payments due to Western banks on Libya's failure to meet its commitment to deliver oil for resale. Even if this accusation is exaggerated, such bad experiences may induce Romania and other Bloc countries to go slowly on expanding trade ties. Despite the risks, East European countries are likely to try to supply Libya with goods and services previously furnished by US firms. However, the region's ability to do so is limited. Soviet demands for oil and gas equipment, coupled with its hard currency shortages, could persuade the USSR to look to its East European allies to replace Western equipment purchases. The need to supply the Soviet economy could leave little slack capacity to produce goods for the Libyans. Furthermore, competition from West European and Asian firms also seeking to benefit from US sanctions will limit the Bloc's gains. Libyan authorities are likely to continue to favor these firms over the East Europeans. By employing Western firms, Qadhafi would not only receive better quality goods and services but also isolate the United States from its West European allies. As long as Eastern Europe faces such competition, its gains from increased commercial ties to Libya 25X1 25X1 25X1 25X1 I Declassified in Part - Sanitized Copy Approved for Release 2011/12/29: CIA-RDP97-0077OR000100180001-3 Declassified in Part - Sanitized Copy Approved for Release 2011/12/29: CIA-RDP97-0077OR000100180001-3 Declassified in Part - Sanitized Copy Approved for Release 2011/12/29: CIA-RDP97-0077OR000100180001-3 i Declassified in Part - Sanitized Copy Approved for Release 2011/12/29: CIA-RDP97-0077OR000100180001-3 Secret The USSR and China: Boosting Industrial Use of Computers The Soviet Union and China have each embarked on ambitious programs to bolster labor productivi- ty, raise product quality, and improve management practices by introducing more low- and intermedi- ate-level computer technology throughout their economies. In our judgment, because it has easier access to Western equipment and technical support and less resistance to computer use, China will achieve more rapid short-term progress in the widespread introduction of computers in industrial facilities, but both countries will remain behind the West. Potentially, the efforts to introduce computer technology into Soviet and Chinese industry will create new market opportunities in Western firms, but will heighten tensions among COCOM mem- bers. As China's own computer production capabil- ity and imports rise, moreover, China could become a new target for Soviet computer-related acquisi- tions. Lagging Behind the West Soviet and Chinese enterprises lag behind Western enterprises in exploiting electronic technology to boost productivity and raise product quality. One knowledgeable American academic has estimated that less than 8 percent of Soviet industrial enter- prises had mainframes in 1984. China has far fewer mainframes than the Soviet Union-probably less than 1 percent of China's factories had either minicomputers or mainframes by the end of 1984. Moreover, the Soviets and Chinese both have diffi- culty applying existing computer technology. The Chinese admit to having 70,000 microcomputers idle in warehouses, and to using 50 to 80 percent of their computers ineffectively. Soviet officials have also openly complained that computers are not used efficiently. Nationwide statistics on computer utili- zation are not available, but a recent Soviet press report acknowledged that in Leningrad, on average, only 60 to 70 percent of the capacity of automation facilities and computers is being used. tion and planning Both the Soviets and the Chinese have ambitious goals for the widespread application of computers at factories and research institutes. In January 1985, the Soviet Politburo approved a program for the development, production, and effective use of computer technology and automated systems up to the year 2000. An important part of this effort is a plan to put as many as 1 million personal comput- ers in secondary and vocational-technical schools over the next 15 years. China is also embarking on an ambitious program to broaden the use of com- puters throughout the economy. A number of min- istries and central agencies, spurred on both by the economic modernization strategy and by the US and COCOM adoption of more liberal export control policies toward China, have undertaken programs to apply computer technology to produc- ... But Different Approaches The Soviets, confronted with stronger Western export controls, are being forced to rely more on domestic and CEMA resources to increase the availability of computers. Soviet efforts to obtain Western turnkey facilities and process technology for the manufacture of computer equipment have been consistently rebuffed. The draft 12th Five- Year Plan (1986-90) calls for an increase in overall computer production of 100 to 130 percent and the start of mass production of PCs. Although the Soviets currently have a much more developed computer industry than the Chinese-at least for the larger minicomputer and mainframe systems- production problems, especially in the microelec- tronics and magnetic disk drive areas, have consis- tently frustrated Soviet efforts to increase comput- er output. Secret D/ 1EEW 86-013 28 March 1986 25X1 25X1 25X1 25X1 Declassified in Part - Sanitized Copy Approved for Release 2011/12/29: CIA-RDP97-0077OR000100180001-3 Declassified in Part - Sanitized Copy Approved for Release 2011/12/29: CIA-RDP97-0077OR000100180001-3 Secret China has used its advantage of a more liberal Western export control policy to import large amounts of computers and computer equipment. We estimate that China in 1985 imported 65,000 microcomputers from the West compared with less than 10,000 for the Soviets. The Chinese also have a headstart on the Soviets in the application of personal computers, acknowledged in both coun- tries as one of the key components in raising industrial efficiency and spurring innovation. Since the beginning of 1983, when the government an- nounced a decision to focus on minicomputers, China has purchased over 125,000 PCs from the West. Although China has recently cut back on purchases of Western PCs, this has been partially offset by increased domestic production, primarily through the assembly of imported computer kits. Odds Favor Greater Chinese Progress ... Domestic Opposition. The Soviets have to deal with opposition from party and police officials, who view the widespread use of computers as a threat to the state monopoly of information. The prospect of millions of personal computers-each a potential printing press when coupled with a printer and wordprocessing software-alarms the leadership. In contrast, the Chinese seem to have fewer ideological inhibitions against broad dissemination of information. Chinese managers generally need less persuasion than their Soviet counterparts to adopt computer technology. Incentives to improve profitability by cutting waste, reducing production costs, and in- creasing output are built into China's economic reform program-and many managers have sought computers to improve industrial performance. In contrast, Soviet managers often are reluctant to incorporate new technologies that could temporar- ily lower output. Moreover, bonuses are often tied to the number of computer tasks performed and to the number of subsystems in place. So, instead of developing integrated systems, users create many separate-cumulatively inefficient-systems. Computers in China and the USSR, Number of units 1985- (except where noted) Minicomputers/ mainframes 10,000 60,000 Minicomputers/ mainframes 2,000 4,000 to 6,500 a Estimated. Reliable statistics on the Soviet and Chinese computer sectors are scarce. Our estimates are drawn from Chinese and Soviet statements and analysis of trade data. Yet another barrier for Moscow is resistance from Soviet industrialists and scientists to the use of imported equipment or production lines to meet demand while the domestic computer industry gears up. Our statistics on Soviet computer imports are incomplete, but we believe that the vast major- ity of the computers in the Soviet Union were manufactured domestically. The fear is that mas- sive imports will undermine commitment to domes- tic development of computer technology. Beijing has also grown protective of its infant computer industry in the last few months. Even so, Beijing acknowledges the need for imports-of microcom- puter kits, or finished minicomputers and main- frames, if not of completed micros. We estimate that since the start of 1983 imports have accounted for roughly two-thirds of China's microcomputer inventory. Greater Access to Foreign Technology and Train- ing. China enjoys greater access to Western com- puters, production technology, training, and after sales support than the Soviet Union. COCOM relaxed restrictions on sales of eight-bit comput- ers-the type sought for school use-to the Soviet 25X1 25X1 Declassified in Part - Sanitized Copy Approved for Release 2011/12/29: CIA-RDP97-0077OR000100180001-3 Declassified in Part - Sanitized Copy Approved for Release 2011/12/29: CIA-RDP97-0077OR000100180001-3 Secret Union in January 1985, but controls on sales of more sophisticated 16-bit computers required for Soviet industrial, scientific, and higher education applications remain stringent. For China, US ex- port licenses for most 16-bit microcomputers have routinely been approved since November 1983; US firms have been able to get bulk distribution li- censes for them for more than a year. Although the licensing process is lengthier for minicomputers and mainframes, most are also approved by the United States and COCOM for sale to China. Beijing also faces fewer obstacles to the transfer of computer production know-how. China is currently pursuing more than 100 cooperative projects for computer or peripheral production with foreign firms-mostly US-and last year signed its first joint venture agreement to coproduce mainframes. US and CO- COM guidelines strictly embargo transfers of com- puter production technology to the Soviet Union. China also benefits from the overseas training available to students, engineers, and technicians. Our records are spotty, but nonetheless show a clear trend: between 1979 and 1985, the United States hosted thousands of Chinese students and trainees in computer-related fields, according to information supplied on visa applications. The Soviets have, by and large, sent students and engineers to East European countries, where the level of technology and quality of instruction is generally inferior. ... But Both Will Remain Behind the West Nonetheless, we believe both the Soviet Union and China will for many years remain far behind the West in effectively assimilating computer technol- ogy into their economies. One obstacle both coun- tries face is the poor internal coordination of plans for the computer industry. In the Soviet Union, four ministries are producing computer hardware and nearly 30 ministries are involved in the devel- opment of software. To overcome this problem, the Soviet Politburo in March 1986 adopted a decision calling for an all-union state committee for com- puter technology and information science, which would be responsible for coordinating all projects involved in the development, manufacture, use, and servicing of computers. Beijing formed just such an oversight agency in 1982, but dozens of agencies that import or use computers are still not represent- ed on the body. In both countries, the absence of strong central coordination will impede progress in adopting national standards for computer equip- ment and software. computer networking. Although US and COCOM controls over sales of Western computer equipment will have a greater impact on the Soviet computerization effort, export controls will also frustrate China's attempts to broaden computer use. Controls on sales of main- frame computers, advanced software, networking equipment, and telecommunications gear will re- strict China's use of computers in some areas, including robotics, microcircuit design, seismic 25X1 data processing, weather forecasting, and intercity Inadequate support also will continue to impair both countries' efforts to use their computers effec- tively. In China, as in the USSR, shortages of key technical personnel will not be quickly remedied. Both countries have only a fraction of the number of programers, repairmen, educators, and other technical support personnel available in the United States.' We expect Beijing will be slow to imple- ment its ambitious plans for a tenfold increase in the number of software writers by 1990 and a similar jump in the number of service personnel. Moscow's plans, far less well defined, will probably take even longer before yielding significant results. In addition unreliable electric power systems cause frequent computer crashes and damage to equip- ment, and erratic telecommunications links prevent local or wide area computer networking. Finally, Soviet and Chinese users both have to find ways to communicate with their computers in Russian or Chinese-languages for which little computer software and hardware have been devel- oped. Neither country can hope to make computer use widespread if users must know English or ' Estimates place the US figure near 500,000, the Chinese number at roughly 18,000. Comparable statistics for the Soviets are not available, but shortages of software and service personnel have been . Declassified in Part - Sanitized Copy Approved for Release 2011/12/29: CIA-RDP97-0077OR000100180001-3 We believe a Chinese decision to sell the Soviets computer equipment is unlikely as long as Beijing views Moscow as a strategic threat and believes such sales would contribute to Soviet military strength. But because individual Chinese factories are encouraged to boost profits and foreign ex- change earnings-and are periodically granted au- tonomy to conduct their own foreign trade-such sales could occur outside of Beijing's control. For Declassified in Part - Sanitized Copy Approved for Release 2011/12/29: CIA-RDP97-00770R000100180001-3 Secret Japanese as a prerequisite. Off-the-shelf software packages to handle routine tasks, readily available in the West, must also be adapted to Russian or Chinese-and often completely rewritten to accom- modate unique Soviet or Chinese inventory or accounting practices as well. The United States Will Face New Export Control Issues We expect the demand for computers generated by the Soviet and Chinese industrial modernization efforts to generate new frictions among COCOM allies over export control issues. European CO- COM members may be more eager than the Unit- ed States to permit the sale of computer equipment and production lines to the Soviet Union-where their firms have established commercial ties-and less so to China, where US firms have taken the lead. Although turnkey computer factory transfers to the USSR are currently prohibited by US and COCOM regulations, West European vendors are particularly interested in such sales. Moreover, as China grows increasingly interested in acquiring networking equipment, advanced software, super- computers, and production technology for mini- computers and mainframes, COCOM differences will crop up with greater frequency in these areas as well. Washington will be the primary target of COCOM frustrations, in our view, because US sales will generate the vast majority of the contro- versial cases; US firms not only are China's major source of supply for large computers, they also are likely to be more willing than their competitors to transfer production technology. The development of China's computer industry could also create additional export control issues for the United States and COCOM in the future. China's industry is advancing most rapidly in an area where the Soviets are particularly weak- personal computer technology. As a result, China could become a target for Soviet attempts to acquire microcomputer and peripheral equipment. example during a period of decen- tralized trade control last year, the Soviets pur- chased 1,000 16-bit PCs-IBM PC/XTs or PC/XT copies. In the future, Chinese exports to nonaligned developing countries-an attractive market for a new entrant to the electronics trade- could also find their way to the Soviet Union without Beijing's complicity and without COCOM approval. 25X1 2 A11 25X1 25X1 Declassified in Part - Sanitized Copy Approved for Release 2011/12/29: CIA-RDP97-00770R000100180001-3 Declassified in Part - Sanitized Copy Approved for Release 2011/12/29: CIA-RDP97-0077OR000100180001-3 Secret Shakeup Pending in Indonesia's Oil Industry Energy relationship. Rumors are circulating in Jakarta of a wholesale shakeup at Pertamina-the state oil monopoly-when the five-year term of the board of directors expires at the end of March, according to the US Embassy. President Director Ramly, who replaced the discredited Joedo Sumbono in 1984, is among those rumored to be getting the ax. There are also hints of a reorganization at the Department of Mines and Energy, including the creation of two junior ministerial positions-one for oil and one for oil marketing-Ramly will reportedly be the junior Minister for Oil. The rumor that Ramly may be on his way out is partic- ularly disquieting since he has the confidence of foreign oil companies. Replacing him with an unknown when oil prices have collapsed and Indonesia is experiencing difficulty marketing its crude oil abroad could create some friction until the new director and the companies establish a working Indonesia Rescinds According to a US Embassy report, the government in late February Official Crude Oil abandoned the use of the official price for crude oil as a reference for assessing Selling Price foreign oil companies' tax liability and cost reimbursements. This decision effectively reestablished the 85/15-percent split between the government and production sharing contractors and clears the way for them to maximize oil production as requested by Jakarta. The government has been anxious to boost output to offset declining prices. Jakarta's adherence to an unrealistically high official price, however, had effectively reduced the split to an estimated 90 to 95 percent for Jakarta and 10 to 5 percent for the oil companies. As a result, foreign oil companies were reluctant to increase output. Financing Venezuela's Press reports indicate that PDVSA, the state oil monopoly, continues to seek Joint Oil Ventures joint ventures abroad to secure a captive export market for 800,000 b/d of crude and refined products-more than half PDVSA's planned exports. The strategy is to acquire up to 50-percent equity in existing refining and 25X1 distribution facilities, while leaving operating authority with the foreign partner. Last month Caracas announced deals that will soon bring exports to such captive clients abroad to about 440,000 b/d. Negotiations with British Petroleum, Exxon, and Champlin Petroleum-and reported interest in at least three additional facilities-would push the total over the 800,000 b/d mark. Such acquisitions venture partners accepted payment in petroleum. were to have been financed out of PDVSA's investment reserve, but this fund may be used instead by the central government to cover a looming budgetary deficit. In that case, acquisitions would be difficult to finance unless joint Secret D/ /EEW 86-013 28 March 1986 25X1 2 ici Declassified in Part - Sanitized Copy Approved for Release 2011/12/29: CIA-RDP97-0077OR000100180001-3 II Declassified in Part - Sanitized Copy Approved for Release 2011/12/29: CIA-RDP97-00770R000100180001-3 Secret Jordanian Oil Exploration Agreement Signed Yugoslavia Seeks Lower Oil Import Prices Egypt's Nuclear Power Option Secret 28 March 1986 According to press reports, Jordan signed a profit-sharing agreement with the US firm Amoco last week. Under terms of the agreement, Amoco will search for oil in the Jordan Valley and Al-Azraq regions. The agreement extends for seven and a half years, with the company obligated to conduct extensive field studies of the exploration areas. Amoco will drill at least five exploratory wells. exports to Western markets. Yugoslavia has negotiated lower oil import prices with its Middle Eastern suppliers and with the Soviet Union, which normally supplies about 50 percent of the country's oil imports. According to the US Embassy in Belgrade, import prices for March delivery have reportedly been reduced on average by 26 percent, and new prices are to be negotiated following this week's OPEC meetings. If the lower prices remain in force and Yugoslavia imports the planned 217,000 b/d in 1986, Belgrade's oil import bill would be cut by at least $500 million. While falling oil prices are good news, the benefits will not be as large as the price reductions suggest. Hard currency savings will be much less because the bulk of Yugoslavia's oil imports are barter trade or clearing account deals. Although energy-dependent industries will benefit, enterprises that depend heavily on exports of goods and services to the Middle East or the Soviet Union may lose sales, and may be unable to redirect their low-quality outcome of the government study. The Egyptian Government appears determined to keep alive its plans for civil nuclear power, despite continuing economic difficulties. President Mubarak led cabinet reviews in January that reaffirmed the importance of nuclear power for future electricity generation, according to the US Embassy. Nuclear power had been questioned in light of the deteriorating economy, a World Bank recommendation that coal would be a more cost-effective energy source, and concerns about the safety of nuclear energy. The Egyptians are having difficulty financing the ambitious El Dabaa nuclear power project-the centerpiece of their immediate nuclear plans, and austerity measures cloud the short-term prospects for nuclear power in Egypt. The Embassy reports that Mubarak will postpone any decision on the El Dabaa contract pending the 25X1 25X1 Declassified in Part - Sanitized Copy Approved for Release 2011/12/29: CIA-RDP97-00770R000100180001-3 Declassified in Part - Sanitized Copy Approved for Release 2011/12/29: CIA-RDP97-00770R000100180001-3 South African Rescheduling Moves Forward South Africa and its commercial bank creditors have agreed to modify the compromise debt accord suggested last month by Swiss debt mediator Fritz Leutwiler, extending the deferral of principal repayments from 12 to 15 months. The agreement-negotiated by 12 key creditor banks-still requires 25X1 the cooperation of some 200 smaller creditors. Under the new plan, Pretoria's unilateral freeze of $14 billion of its $24 billion in foreign debts would be re- placed on 1 April by a tacit agreement by banks to roll over 95 percent of the currently frozen loans through June 1987. Pretoria is to repay the other 5 percent on the original maturity dates during this extension. In addition, a 5-percent downpayment on the arrearages accumulated during Pretoria's unilateral freeze would be paid on 15 April. Creditor banks plan to review the South African situation in April 1987. 25X1 many banks hope to replace the current arrangement with a 5-to-7- 25X1 New Moroccan Rescheduling Talks Tunisia Borrows Again year rescheduling agreement at that time. If black unrest persists during the coming year, however-which we consider likely-creditors may again resort to a short debt deferral to maintain the appearance of pressuring Pretoria. The initial meeting at mid-month on rescheduling Morocco's 1985-86 com- mercial debt payments produced few results. Stumblingblocks were financing short-term debt, provision of new loans, and medium-term debt rescheduling terms. Rabat is pressing to convert about half of its $400 million in short-term debt into medium-term debt to be included in the rescheduling. Morocco is also asking for $200 million in new money. The banks are pushing for relatively tough rescheduling terms: a repayment period of 10 years with five years' grace at an interest rate 1.125 percentage points above LIBOR. Talks are slated to resume on 10 April, but could be contentious. Morocco's 1983-84 rescheduling was nearly derailed earlier this year by Rabat's failure to live up tears, according to the US Embassy. Tunisia's growing foreign exchange gap has pushed the government to secure a $175 million Eurodollar loan, the first borrowing in 18 months. Nonetheless, the loan terms-0.5 to 0.63 percentage point over LIBOR-do not show lender apprehension over Tunisia's creditworthiness. The new loan probably will be insufficient to cover the projected financial gap caused by low oil prices and drought this year. With a foreign debt of nearly $6 billion and a debt service ratio exceeding 25 percent, Tunis will have to cover new financial needs by making hard choices between development priorities, taxation, and lower domestic consumption. Moreover, Tunisia's financial troubles may be aggra- vated by Prime Minister Mzali's move to replace the governor of the Central Bank because his pessimistic economic reports reduced President Bourguiba to 27 Secret 28 March 1986 , Declassified in Part - Sanitized Copy Approved for Release 2011/12/29: CIA-RDP97-00770R000100180001-3 Declassified in Part - Sanitized Copy Approved for Release 2011/12/29: CIA-RDP97-00770R000100180001-3 Foreign Views on According to US Embassy reporting, many nations support the principle of Including Investment including investment issues in the GATT, but differ over which matters should Issues in the GATT be addressed. To date, the most positive support has come from the govern- ments of France, Japan, Spain, Switzerland, and Togo. Of the OECD countries expressing reservations, most fear strong LDC resistance and overloading the GATT agenda. A member of the West German Government said that most EC members believe the US proposals go too far, too quickly, and cannot win acceptance by the LDCs. Most governments believe the LDCs will be particularly opposed to inclusion of investment if topics such as right of establishment and expropriation are included. Moreover, Bonn and London are concerned that hostile LDC reaction toward including investment will adverse- ly affect new round negotiations covering services issues. LDC reaction has been mixed. The traditional hardliners-Argentina, Brazil, India, Yugoslavia, and Egypt-opposed the US position at last week's GATT preparatory meetings. Most of the developing countries, however, are studying the issue and waiting for other LDC reaction before taking firm positions. Foreign Views on US Initiative To Include Investment Issues in the GATT Secret 28 March 1986 Supports/Agrees Agrees in No Objection/ With US Position Principle Possible Support France European Community Canada Japan Italy Finland Spain New Zealand Indonesia Switzerland West Germany Thailand Togo Norway South Korea Sweden Tunisia Ghana Uruguay Noncommittal Opposes US Position Australia Argentina Denmark Brazil Iceland India United Kingdom Egypt Malaysia Yugoslavia Pakistan Cuba Singapore Colombia Declassified in Part - Sanitized Copy Approved for Release 2011/12/29: CIA-RDP97-00770R000100180001-3 Declassified in Part - Sanitized Copy Approved for Release 2011/12/29: CIA-RDP97-0077OR000100180001-3 More Libyan Aid for Sudan Global and Regional Developments Libya is providing new military materiel and support to Sudan and may provide additional amounts of economic assistance. The US Embassy in Khartoum says, on the basis of a variety of sources, that Libya has moved as many as 300 trucks filled with food and military supplies to western Sudan to aid government efforts to dislodge rebel forces. In addition, the US Embassy says Tripoli probably will supply up to 100,000 metric tons of crude oil this year, although the terms of the agreement have yet to be settled. Unlike the 300,000 tons of free oil Libya supplied last year, the new oil may be in barter for Sudanese goods and services. In return for this largesse Qadhafi probably will demand that Khartoum distance itself further from the United States and Egypt to keep aid deliveries on track, and may ask for Sudanese support for Ottawa's Banking Proposal Criticized 7 Probable Japanese Pump-Priming Measures Libya's position in Chad. National Developments Developed Countries dominance of Canada's financial activity. Ottawa is planning to designate Montreal and Vancouver as international banking centers. The proposal, as it currently stands, would exempt banks in these cities from a number of taxes, including provincial capital taxes and those on international transactions, as a means of attracting more international banking activity and hence more jobs. The plan has been criticized by financial analysts and the banks, however, as providing little incentive for the banks to repatriate their overseas operations because it neglects to reduce Canada's relatively high withholding tax. Ottawa continues to reject the tax concessions sought by the financial community because such action would reduce tax revenue when the government is trying to reduce the budget deficit. As a result, critics claim the proposal is a crude attempt by Ottawa to boost its do- mestic support in Quebec and British Columbia by lessening Toronto's The economic stimulus package Tokyo plans to announce before Prime Minister Nakasone's US visit in mid-April will do little to boost an economy hard hit by the yen's recent upsurge. Large tax cuts and a sharp rise in government spending are not seriously being considered because most econom- 25X1 is policymakers, including Nakasone, remain committed to budget austerity. Instead, Tokyo is likely to announce a package that includes accelerated public works expenditures, reduction in utility rates, a further discount rate cut, and additional relief for small exporters hurt by the strong yen. Plans to disburse 80 percent of fiscal 1986 public works spending in the first half of the year will add little stimulus-70 percent is the normal practice. Expected reductions in utility rates-less than $2 a month per household-will do little to spur consumer spending. Previously discussed modest cuts in income tax rates have been shelved, according to the US Embassy, but may come up again before this summer's elections. F___1 25X1 29 Secret 28 March 1986 Declassified in Part - Sanitized Copy Approved for Release 2011/12/29: CIA-RDP97-0077OR000100180001-3 Declassified in Part - Sanitized Copy Approved for Release 2011/12/29: CIA-RDP97-0077OR000100180001-3 London Moving To Ease Monetary Policy New French Economic Team Secret 28 March 1986 States, West Germany, and Japan lowered their discount rates. Chancellor of the Exchequer Lawson, in his budget speech last week, reaffirmed London's committment to a "sound" monetary policy, but there are signs that there will be some easing in the coming months. Lawson reinstated sterling M3 as a monetary tool and said that the 1986-87 higher target range of 11 to 15 percent is still consistent with an anti-inflation policy. London had dropped the sterling M3 measure last year after it exceeded the 5- to 9-percent growth target and as a result of complaints in financial markets that M3 was an unreliable indicator of monetary conditions. As another sign of easier credit, the Bank of England lowered its money market intervention rate the day after the budget speech. This permitted commercial banks to lower base lending rates by I percentage point to 11.5 percent. We believe London will be able to ease its monetary policy further over the next several months because inflation is expected to fall from 5.5 percent to 4 percent this year, and sterling has strengthened against the dollar and the deutschemark since the United al trade war with the United States to protect its export markets. pected to fight vigorously to protect French and EC farmers. In his first public statements he warned that the Community must be prepared for an agricultur- Prime Minister Chirac has pledged to press for swift economic reform- especially denationalization--during his first months in office, and Chirac's cabinet underscores the importance he attaches to economic issues. While President Mitterrand pressed hard to influence ministerial appointments in foreign affairs and defense, Chirac managed to handpick his economic team. Chirac named Edouard Balladur, his longtime confidant and top political aide, Minister of State for Economy, Finance, and Privatization. As head of what the press has termed France's "superministry," Balladur is likely to emerge as the most important cabinet member after Chirac. Although his experience in economic affairs has been limited, US diplomats consider Balladur an extremely competent moderate who is committed to a free market approach. Alain Juppe, junior minister in charge of the budget, is perhaps Chirac's most trusted economic adviser, and has repeatedly called for simultaneous tax and budget cuts. Chirac installed another member of his neo-Gaullist party, Michel Noir, as junior minister for trade. Minister of Agriculture Francois Guillaume is head of the most powerful French farmers' union and can be ex- Declassified in Part - Sanitized Copy Approved for Release 2011/12/29: CIA-RDP97-0077OR000100180001-3 I Declassified in Part - Sanitized Copy Approved for Release 2011/12/29: CIA-RDP97-00770R000100180001-3 Secret Stronger-Than-tit Expected West German GNP Italy Lowers Discount Rate Turkish Response to Foreign Exchange Difficulties 400,000 new jobs. Stronger-than-expected gains in private consumption should propel real GNP growth into the 4-percent range this year-a big bonus for the Bonn coalition's reelection prospects. Real disposable income will be boosted by nominal wage gains between 3.5 and 4.5 percent, combined with inflation of about 1 percent. Already low West German inflation is improving because of the weak dollar and falling oil prices. Also adding to purchasing power will be this year's DM 11 billion tax cut, new family income supplements, and as many as bank loan growth in the near future. On 21 March, Treasury Minister Goria lowered Italy's official discount rate by 1 percentage point to 14 percent, but this is not likely to have much impact on real interest rates, currently 7 to 9 percent. Goria announced that the move, which follows similar reductions in other industrialized nations, was made possible by declining domestic inflation, a recent increase in the Bank of Italy's reserves, and the favorable impact of falling oil prices. The market, however, probably will not respond quickly to Treasury's signal. Difficulty in marketing treasury securities, which forced Rome to raise rates on three- and six-month treasury bills in January, persists and will keep those interest rates high. According to the Italian Bankers Association, commercial banks are reluctant to decrease their rates because of credit and foreign exchange restrictions imposed in conjunction with January's treasury rate hikes. Moreover, neither the Treasury nor the Bank of Italy appears willing to remove the ceiling on Speculation in Turkey's foreign exchange markets and a shortage of foreign exchange prompted Ankara to devalue the lira by 5.2 percent against the dollar on 14 March and retreat from plans for further liberalization of foreign currency regulations. The Central Bank has set the band within which commercial banks trade foreign exchange at plus or minus 1 percent of its offi- cial exchange rate, putting an end to the unrestricted trading permitted since last July. The bank said free market operations would resume as soon as possible. Ankara also asked the United States in February to disburse the remaining $19.6 million in fiscal year 1986 ESF aid early because of a serious foreign exchange shortage. Following expiration of grace periods on previously 31 Secret 28 March 1986 Declassified in Part - Sanitized Copy Approved for Release 2011/12/29: CIA-RDP97-00770R000100180001-3 Declassified in Part - Sanitized Copy Approved for Release 2011/12/29: CIA-RDP97-0077OR000100180001-3 ing the situation. rescheduled debt, debt service jumped by one-fourth to an estimated $3.7 billion in 1985, equal to approximately 28 percent of foreign exchange earnings. In addition, Turkey's foreign exchange position has been strained by Ankara's decision to buy oil on the spot market while it tries to renegotiate ex- pensive barter contracts with Iran and Libya. Moreover, Iraqi arrearages on $800 million in Turkish export credits extended since 1983 may be aggravat- Less Developed Countries Guatemalan Economic resident Cerezo's economic program contains several positive steps to Program Announced revitalize the economy but, on balance, is unlikely to reduce the budget deficit, decrease inflation, or restore business confidence. Without formally changing the official exchange rate, the program shifts most commodity imports and exports to a new "regulated" exchange at a rate close to the former parallel market and includes a more flexible rate for most services. Debt service payments will continue at the official rate. The package calls for a 5-percent cut in public spending and higher luxury and export taxes. Nevertheless, it also grants a public-sector wage increase and promises creation of 40,000 tempo- rary public jobs. Price controls were retained on 25 consumer good categories. Subsidies for public transportation and imported medicines also will continue. The measures are unlikely to satisfy Algerian Belt-Tightening new lending he is counting on. international creditors and will make it difficult for Cerezo to negotiate the dealing decisively with local disturbances. Algeria, facing up to a 50-percent drop in its hydrocarbons earnings this year, has begun implementing austerity measures. So far, the Bendjedid government has cut tourist overseas travel allocations in half and reduced allowances for the annual pilgrimage to Mecca. Efforts are also under way to cut nonessential imports and postpone development projects. In addition, Algiers is making plans to borrow heavily on the international market. Embassy reporting indicates Algeria is seeking a $500 million loan, but Algiers' insistence on easy terms could thwart the effort. Any political backlash from harsh adjustment measures will probably be limited largely because the government has been preparing the populace for some time for economic hard times ahead. Moreover, Algiers has shown the will to use its extensive security forces in Saudis Delay Budget King Fahd recently surprised most government ministers and the Saudi business community by postponing for at least 5 months a new budget for the fiscal year that began 11 March. The delay puts off tough decisions on further spending cuts and allows monthly spending to continue at last year's level. Last year, spending was reduced 8 percent and started to have a direct impact on Secret 32 28 March 1986 25X1 25X1 25X1 Declassified in Part - Sanitized Copy Approved for Release 2011/12/29: CIA-RDP97-0077OR000100180001-3 i Declassified in Part - Sanitized Copy Approved for Release 2011/12/29: CIA-RDP97-0077OR000100180001-3 Secret Omani Spending Cuts Saudi citizens, but this failed to balance the budget because oil earnings- about two-thirds of government revenue-fell rapidly The Omani Government has cut spending in its 1986 budget because of sharply lower oil earnings. An early casualty is the purchase of 8 Tornado fighter aircraft from the United Kingdom-delaying the purchase until 1992 effectively cancels the deal. Defense spending overall has been cut 25 percent from 1985 levels. In addition, most new development projects have been halted. 25X1 25X1 25X1 25X1 More Indonesian Budget Woes time when the Indonesian economy is in a tailspin. According to US Embassy reporting, the continued fall in oil prices may soon force an additional $1.8 billion in budget cuts-including $1.3 billion in project reductions-over those proposed last January. The new cuts occur at a the economy is expected to contract by 4 to 5 percent in 33 Secret 28 March 1986 1986, and there is growing sentiment for government deficit spending to spur economic activity. So far Jakarta has resisted such moves for fear of touching off a new round of inflation. In addition, the government is afraid that any rise in interest rates would "crowd out" the private sector in Indonesia's thin capital markets. Jakarta continues to pin its near-term economic hopes on an expansion of the nonoil sector, but is moving slowly on basic economic reforms to encourage exports. For example, at the same time the Finance Ministry was denying rumors earlier this month that foreign exchange controls were being contemplated, the Trade Ministry was imposing more import restrictions. 9 Y1 25X1 2bAl Declassified in Part - Sanitized Copy Approved for Release 2011/12/29: CIA-RDP97-0077OR000100180001-3 Declassified in Part - Sanitized Copy Approved for Release 2011/12/29: CIA-RDP97-0077OR000100180001-3 Secret Philippines Lifts In our judgment, the Aquino government's lifting this week of a ban on the ex- Copra Export Ban port of copra-the oil-bearing meat of a coconut-should improve the economic situation in the countryside, where one-third of the population relies on coconuts as its primary source of income. The export ban, imposed in 1982, resulted in low domestic copra prices because farmers were forced to sell to a small number of domestic coconut oil mills controlled by a close Marcos associate. We estimate that copra prices will increase by at least 50 percent over the next several months as oil mills and exporters will now compete for domestic copra. The chairman of the government's Coconut Authority has warned, however, that the ban could be reimposed if domestic mills encounter a shortage of copra. Malaysia Planning Details of the Fifth Malaysia Plan-covering 1986-90-which was released for Slower Growth this week, projects slower growth than during the past five years, rising unemployment, and increasing reliance on the private sector for investment funding. The new plan envisions average annual real GDP growth of 5 percent through 1990 and unemployment rising to 10.1 percent. With projected growth now at 3 percent for 1986 and little improvement likely in the next two years, growth over the final two years of this period would have to exceed 7 percent annually for the plan to succeed. We believe that the plan implies further backpedaling on improving economic opportunity for ethnic Malays under the New Economic Policy, which will have an adverse effect on the government's prospects in elections widely expected within the next few months. China Unveils New Five-Year Plan China Considers National Pension Plan Secret 28 March 1986 exceeded. Premier Zhao Ziyang presented a draft of China's Seventh Five-Year Plan (1986-90) for discussion during the annual National People's Congress. The document calls for further reform of the Chinese economy, including limiting the number of products under state control and making more enterprises economically independent entities. The plan also is aimed at slowing and consolidating economic growth during the period, but Zhao acknowledged that the target of 7.5-percent average annual growth in GNP is likely to be drafted. The Ministry of Labor has announced that it is considering a national pension plan for retired workers. The proposed plan would require each enterprise to contribute a specific percentage of its payroll to a national fund, rather than being solely responsible for its own retirees as is currently the case. The ministry cites the new plan, implemented in trial areas early last year, as being more equitable and particularly helpful for older enterprises with a large number of retirees. We believe the system is also being considered as part of plans to allow individual firms more economic independence, including the possibility of failure and dissolution under the bankruptcy laws currently being Declassified in Part - Sanitized Copy Approved for Release 2011/12/29: CIA-RDP97-0077OR000100180001-3 25X1 Declassified in Part - Sanitized Copy Approved for Release 2011/12/29: CIA-RDP97-0077OR000100180001-3 Next 1 Page(s) In Document Denied Iq Declassified in Part - Sanitized Copy Approved for Release 2011/12/29: CIA-RDP97-0077OR000100180001-3 Declassified in Part - Sanitized Copy Approved for Release 2011/12/29: CIA-RDP97-0077OR000100180001-3 Secret Secret Declassified in Part - Sanitized Copy Approved for Release 2011/12/29: CIA-RDP97-0077OR000100180001-3