(UNTITLED)

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP97-00771R000707490001-5
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 35
• Document Creation Date: January 12, 2017
• Document Release Date: September 21, 2010
• Sequence Number: 1
• Publication Date: April 19, 1985
• Content Type: REPORT

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Directorate of
Intelligence
International
Economic & Energy
Weekly
19 April 1985
e ret -
DI IEEW 85-016
19 April 1985
Copy
4R7
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International
Economic & Energy
Weekly 25X1
19 April 1985
iii
Synopsis
1
/Perspective-Morocco: The Economy and Stability
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7
ummit Issues: The New GATT Round 25X1
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Nicaragua: Oil Problems and Prospects 25X1
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ll-I
15
Guyana: Economic Troubles Portend Closer Communist Ties
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19
New Zealand: Lange Turning the Economy Topsy-Turvy 25X1
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Energy
International Finance
Global and Regional Developments
National Developments
Comments and queries regarding this publication are welcome. They may be
directed to Directorate of Intelligence
Secret
in e..-. IADc
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Secret
International
Economic & Energy
Synopsis
Morocco's inability so far to redress its deteriorating economy, high unemploy-
ment, and rising expectations of the-young has led to increasing popular
Morocco's weak financial situation is making it hard for the military to
maintain or modernize its equipment. Despite tough austerity measures to
stem the deterioration of the economy, Rabat is shopping for new arms, in par-
Weekly
1 Perspective-Morocco: The Economy and Stability
discontent.
3 Morocco: Austerity and the Military
ticular US fighter aircraft and armored equipment.
At the Summit, leaders may discuss timing, agenda, and how to broaden
support for a new round among developing countries. Nevertheless, much
remains to be settled before the United States realizes its objective of
launching a-trade round by 1986 covering services and other new areas.
9 Nicaragua: Oil Problems and Prospects
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Nicaragua's dependence on crude oil imports and susceptibility to supply
disruptions have resulted in serious shortages and other economic problems in
the last year. Managua faces the prospect of further, potentially serious
shortfalls even as its dependence on Soviet deliveries and Cuban technical
expertise is likely to continue to grow.
15 Guyana: Economic Troubles Portend Closer Communist Ties
Despite Guyana's wealth of resources and official claims of recent progress,
the country's economy is in a shambles. Meanwhile, President Forbes Burn-
ham has been exploring an alliance with his Marxist-Leninist political
opposition, apparently in the hope of gaining Soviet Bloc economic assistance.
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19 New Zealand: Lange Turning the Economy Topsy-Turvy
Although the ANZUS controversy has dominated press coverage, we believe
the electorate will judge Prime Minister Lange's Labor government according
to its progress on the economy.
iii Secret
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19 April 1985
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Perspective
International
Economic & Energy
Weekly
19 April 1985
Morocco: The Economy and Stability
the Soviet Bloc as a second best solution.
Morocco's inability, so far, to redress its deteriorating economy, high unem-
ployment, and rising expectations of the young has led to increasing popular
discontent. Managing these challenges is taxing even the political skills of
King Hassan II and may over time destabilize the country. If badly needed aid
is not forthcoming from the West, Rabat may seek closer ties with Libya or
Morocco's economic problems will remain severe for the rest of the decade:
? World prices and demand for phosphate-Morocco's main export-probably
will not rebound in the near term.
? A burgeoning population and six years of drought have forced a sharp
increase in food imports. In addition, Morocco imports almost all of its
energy requirements.
? The seemingly endless Western Saharan conflict continues to divert re-
The nation's financial crunch requires massive additional debt relief. Even
with rescheduling, substantial-financial gaps will'remain. Moreover, relations
with Paris and London Club creditors have been tarnished by payment delays
necessitated by dwindling foreign exchange reserves. Failure to cover arrears
on US CCC credits forced the termination of US grain shipments in 1985 that
is causing a serious food shortfall. In addition, the rapid deterioration of
military equipment is causing Rabat to undertake a costly modernization
sources from social and economic programs.
program to meet the perceived Algerian and Polisario threat.
Riyadh is unlikely to provide more than emergency economic assistance
Foreign assistance from traditional sources will remain tight. France has
turned down Moroccan requests for new military purchases until Rabat clears
up large arrears and is also reluctant to supply additional grain. Saudi Arabia
has agreed to provide up to 50 percent of Morocco's oil needs this year, but
support to the Polisario Front.
The Moroccan-Libyan union has bought some time by raising popular
expectations about financial aid and jobs in Libya. Economic benefits of the
union have been few so far. Libyan aid is not likely to be sufficient or timely
enough to head off short-term trouble. Nevertheless, Rabat will continue the
union as long as Qadhafi does not meddle in its internal affairs or renew
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 Popular discontent is being fueled by a.widening gap between a wealthy few
and impoverished many. Unemployed youth are a.growing problem-half the
population is under 20-and planned budget cuts for education will prove
unpopular. The poor, the young, intellectuals, and urban professionals have
increasingly turned to Islamic fundamentalism as a means of expressing their
discontent with the regime. We believe the unhappiness arising from secular
socioeconomic problems in the long run could erode the King's status as
defender of the Islamic faith. During widespread riots in January 1984,-for ex-
ample, fundamentalists helped foment unrest by distributing tracts attacking
the King's economic mismanagement and ostentatious lifestyle. Moreover,
three major parties, refused to participate in a new government formed this
month because they strongly disagree with the regime's economic program.
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19 April 1985
We believe Hassan is aware of the pitfalls ahead.I
discontent.
we expect that the King will have to rely
more heavily on his fairly effective security and, military forces to suppress
If Rabat does not receive adequate aid from its traditional supporters, we
believe that Morocco will seek closer economic ties-with Eastern Europe and
the Soviet.Union to. expand trade and other commercial relations. Hassan
courted the Soviets in the 1960s and knows that aligning his policies with them
will not solve Morocco's long-term problems, would damage his moderate
image, and reduce his flexibility. Nevertheless, the significance attached to
new trade accords signed in September 1984 and comments by key Moroccan
officials underscore a willingness to consider, if not undertake, closer ties to the
Bloc.
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Morocco:
Austerity and the Military
Morocco's weak financial situation is making it
hard for the military to maintain or modernize.its
equipment. In addition, the long war in Western
Sahara and poor maintenance are rapidly taking
US'--and, French-made army equipment out of
operation. Despite tough austerity measures to
stem the deterioration of the economy, Rabat is
shopping for new arms. Efforts to rebuild inven-
tories and -purchase new equipment will be ham-
pered by the need ..to reschedule more military debt
this year and to-balance urgent social needs against
military modernization. In particular, Morocco is
seeking US fighter aircraft and armored equipment
and. will push,for concessional financing at the
Joint Military: and:Economic Commission meetings
Military Modernization
The Royal Moroccan armed forces have been
largely apolitical since senior officers led two coup
attemptsagainst- King Hassan in 1971 and 1972.
that political or
military setbacks in-the nine-year-old war, econom-
ic problems affecting the flow of-materiel, or a
reduction-in living standards could cause the mili-
tary to turn; against the- King. Hassan is sensitive. to
this and -has consistently stated that defense will
continue to receive priority despite severe spending
cuts :elsewhere under. Morocco's IMF. guided aus-
terity program. Hassan recently announced that he
hopes .to. raise. $1. billion 'to-spend on arms over the
A critical element in` Rabat's continued emphasis
on defense: spending. is the.need for new arms.
Equipment losses in the- Saharan war. have not been
replaced.. Furthermore, Moroccan armed forces
have not kept pace with the modernization and
increased capabilities of the Algerian military,
which Morocco sees as the major external threat.
Morocco's Economic Prospects
Morocco's financial position,is precarious. Official
nongold reserves-of about $49 million cover less
than a week of imports. A large debt service
burden-$2.5 billion-will forceRabat to resched-
ule its foreign debt again this year. Several
drought years and weak markets for Morocco's
primary exports phosphate and citrus fruit-
have frustrated efforts to redress economic prob-
lems. The current account deficit-$1.2 billion last.
year persists despite the sharp decline in the
burdensome oil bill.since 1981-84 percent of
energy supplies are imported. Coupled with a
burgeoning population-over 50 percent is under-
20-the country's economic ills have produced a
serious unemployment situation. Thirty percent of
the urban work force is unemployed.
Continued austerity will be the rule through the
end of the decade if Morocco is to right the
economy. As a result, only limited economic
growth and no improvement in the standard of 25X1
living is expected over the next several years. With
limited financial reserves and a debt service ratio
projected to exceed 60 percent this year-without
debt rescheduling-.on Morocco's $13 billion for-
eign debt, Rabat has no alternative but to look for
additional debt relief'-including military debt-
through 1987. Morocco's pressing social problems
will increasingly consume scarce financial re-
sources if the regime, is, to forestall.-unrest.
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of particular
concern to the military is the rapid decline in
operational readiness because of a lack of spare
parts. Unforeseen diversion of maintenance funds
and frequent cannibalization of equipment further
lower the readiness posture.
Arab Emirates will provide funds fora comprehen-
sive military modernization program. Included in
the plan are US-made M48A5 tanks to replace
wornout tanks and upgrade the armored forces.
Artillery is to come from'the United Kingdom or
Spain.
To refurbish military
transportation, Rabat will. rely on Moroccan- .
assembled trucks and Japanese heavy equipment
transport. In addition, we believe that Morocco also
is looking for a source- of armored personnel- carri-
ers.
The Moroccan Air Force wants to improve- its air
defense-capability by acquiring 24 to 36 US-made
F-16s or Mirage 2000s from France.
The Military and the. Economy
Morocco's defense needs have averaged about 22
percent of the national budget and 6 percent of
GDP over the past decade. Rabat has allocated this
year $640 million for the armed forces and another
$170 million for the national police. Only education
claims a larger share of national revenues. Official
defense figures, however, probably understate actu-
al spending; the cost of the Saharan conflict is
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19 April 1985
Morocco:. Selected Military
Comparisons, Yearend 1984
Fighter aircraft -
81
211
Tanks
328
995
APCs
914'
1,836
Field artillery -
222
945
estimated at $1 million per day by the US Embassy
and is -in addition- to costs Morocco incurs for
equipment,-maintenance, modernization, and mili-
Morocco's financial crunch and inflation-have con-
strained real growth in defense spending- since
1979. Moreover, these problems have forced funda-
mental changes in defense spending priorities. Con-
tracts for new materiel as well as deliveries have
declined, and military personnel costs-have con
sumed an increasing share of available resources.
Rabat's deteriorating financial-position has result-
ed in the reliance on' foreign credits' and grants to
maintain its military. France, Spain, and the Unit-
ed States have been primary sources of materiel
and arms loans. Saudi-Arabia also-provided as.-
much as $350 million in.military aid=annually from
1977 through .1.982.This aid was halted because of
Morocco's -questionable accounting -practices and
Riyadh's higher priorities in-.the Middle`'East.?The
USSR was a-primary,supplier before. perceived
Soviet complicity in!the Saharan conflict caused
King Hassan to terminate the relationship: Moroc-
co's weakened financial position, however, has
caused sizable arrears to mount on-Rabat's $1.2
billion military debt-much of it accumulated, over
the past five-years-especially: to the -French. Ra-
bat also-has narrowly avoided default-on`US-FMS,
loans- on, several occasions.
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Morocco: Estimated Foreign
Military Debt, Yearend 1984
610
45
170
4
160
12
We believe that over the next two years Moroccan
military equipment requirements will become
acute. The Western Saharan war is a popular cause
in Morocco, and the King has little choice but to
continue his military effort until a solution favor-
able to Morocco is found. If the King is perceived
as not providing 'adequately for military require-
ments, he is likely to face strong opposition from
the armed forces.
In our opinion, Hassan will give priority to military
modernization at the expense of social and econom-
ic development. Although this approach wins him
the support of the military, the costs of the war are
being questioned by some influential Moroccans
and could eventually cause trouble for the King.
Morocco: US Foreign _
Military Sales Financing
Fiscal Year Total Loans Grants IMET
1982 31.1 30.0 0 1.1
1983 101.3 75.0 25.0 1.3
1984 58.2 26.7 30.0 1.5
1985 b 51.7 10.0 40.0 1.7
a International Military Education and Training grant assistance.
b Requested.
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France already has refused to supply new fighter
aircraft until financing is assured, a policy that
probably will be extended to other Moroccan arms
requests. The US Embassy in Rabat estimates that
about $6 million in overdue payments remain sub-
ject to Brooke amendment sanctions this year-
Rabat recently paid $12.5 million to avert default
on 30 April. Available US FMS credits for fiscal 25X1
year 1985 are barely sufficient to maintain the
operational status of US-origin equipment.
Closer US-Moroccan ties, initially well received in 25X1
Morocco, are being criticized more frequently by
senior Moroccan officials. Morocco may reduce its
military cooperation if the terms or levels of US aid
do not meet Rabat's expectations.
Morocco will be hard pressed to finance its military
modernization program from traditional sources of
aid. Saudi Arabia has questioned the prudence of
Rabat's military spending in the past, and
iya his
not likely to under vrite the total cost of Hassan's
modernization program. The Saudis probably will
provide as much as $150 million annually for
emergency needs but will look to the West to
shoulder a greater share of Morocco's defense
purchases.
If Hassan is unable to obtain arms from Western
sources, we believe he will turn to Qadhafi, his
partner in the Moroccan-Libyan union. Libyan
military stockpiles, especially Soviet-made ground
force equipment, are more than adequate to fill
Morocco's immediate needs-for example, Libya
has about 1,450 tanks in storage. Poor Algerian-
Libyan, relations probably would provide Qadhafi
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with reason to honor Hassan's request. In addition,
the King may turn to Moscow for :arms, as he.has
repeatedly intimated to US officials: Morocco has
used phosphates as barter for Soviet goods in the
past and could use the output from the renewed
Moroccan-Soviet phosphate development project to
facilitate expanded military trade.
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Summit Issues:
The New GATT Round
Last month, the EC Council formally endorsed
holding a new round of GATT multilateral trade
negotiations, even suggesting that the talks be
called the Brussels Round. This action, along with
last week's OECD ministerial decision to hold a
GATT preparatory meeting this summer, reduces
the distance between Summit participants. Never-
theless, much remains to be settled before the
United States realizes its objective of launching a
trade round by 1986 covering services and other
new areas.
statement at last week's OECD ministerial, howev-
er, opening the possibility of a high-level meeting
on monetary issues, blunts French threats to hold
up action on the new round. because of the trade-
money link.. French President Mitterrand is likely
to try at the Summit to pin the United States down
on.the monetary talks, reminding US officials that
Paris still considers this the quid pro quo for French
cooperation in the new round.
Mitterrand may, nevertheless, try to stall a new
round by arguing-that the agenda must be- clarified.
Summit Country Positions
At the Summit, leaders will discuss timing, agenda,
and how to broaden support for a new round among
developing countries. Although the OECD ministe-
rial decision moved the.EC and France beyond
their March positions on timing, both still refuse to
commit to the early 1986 start sought by the
United States. Some West European countries
remain reluctant to enter into negotiations in areas
such as high technology where they feel at a
competitive disadvantage. The Summit participants
want LDC participation in a new round to be as
broad as possible to achieve significant North-
South trade liberalization and to provide a political
endorsement of the GATT system.
France will be most resistant to an early.launch of a
new trade round. Diplomatic reporting indicates
that Paris-which almost certainly will have the
support of Italy-will continue to stress two pre-
conditions for initiating the talks:
? Better clarification of the agenda, especially re-
garding services and high-technology issues.
? Broad support from the developing countries.
Mitterrand
may argue that high technology is not sufficiently
defined to be singled out for GATT- treatment, but
should be lumped with other industrial goods.
West Germany, the United Kingdom, and Canada
are firmly committed to the new trade round,
although they will argue at the.Summit that the
issue still must be approached cautiously. London
and Bonn's enthusiasm will be tempered by. their
desire to maintain an EC consensus. Ottawa hopes
a new round will stem what it perceives as mount-
ing protectionist sentiment in the United States.
West German officials have warned US diplomats
that they do not want to force the pace of the new
talks if it risks alienating. Bonn's EC partners. Bonn
has similarly underscored the importance of secur-
ing the participation of at least the major develop-
ing countries before initiating the new round. West
German officials may want to avoid appearing to
issue the. LDCs an ultimatum on the precise open-
ing date of the talks and.may, therefore, favor
postponing that decision until the preparatory!
Paris has also argued that monetary issues should
be discussed simultaneously with trade. The US
meeting this summer.
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Secret
In addition to their concerns over timing, Bonn and
London have stressed that inadequately prepared
negotiations will soon founder, leading to recrimi-
nations on both sides of the Atlantic. Bonn and
London favor discussing services, although they
feel the issues need clarification, particularly for
financial services. They also are willing to explore
high technology but agree with France that it
remains an ambiguous issue.
Although the EC Council in mid-March endorsed
Community participation in the new round, be-
cause of continuing differences among EC mem-
bers, Commission President Delors probably. will
try to stick to the Council's declaration and resist
any further commitments at Bonn. The declaration
made Community support for the new round con-
tingent on the establishment of an international
consensus on timing and objectives. The Council
signaled EC willingness to discuss trade in services
but put agriculture almost entirely off limits. In
addition, the declaration excluded any mention of
high technology and asserted that results in the
monetary and financial- areas should be sought in
parallel with results in the trade field. Delors may
try to keep a low profile in Bonn and allow EC
members-especially France-to take the lead.
Japan will support efforts to advance preparations
for a new-round. Although Prime Minister Naka-
sone approves of the trade liberalization a new
round can achieve, other Japanese officials may
hope that -a lengthy round will provide an excuse to
defer aspects of.Japanese trade disputes with the .
United States and.the EC. Japanese enthusiasm for
a new GATT round has not been dampened by
plans of the EC, as well as East Asian LDCs, to
make Japan a major target.
The LDC Perspective
Relatively few developing countries have endorsed
a new GATT round. Developing-country GATT
members, informally led by Brazil and. India,. have
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19 April 1985
attempted to obstruct a new round. They an-
nounced last year that they would consider partici-
pating only if the industrial countries first elimi-
nate many barriers to Third World" exports and
agree to a separate round of North-South negotia-
tions restricted to trade in goods.
The strong unity that developing countries dis-
played in 1984 has weakened, however. The
ASEAN nations and South Korea have indicated- a,
willingness to participate. EC officials, according to
diplomatic sources, believe that other LDCs, even
India, can be won over by a new, round's promise of
restraining protectionism and improving access to
industrial country markets. Brazil shows no sign of
altering its hard line, but, if it and a few other
developing countries could be isolated, we believe
they might agree to participate rather than be
excluded.
Last week's OECD ministerial decision to hold,a
new round preparatory meeting this summer makes;
an early 1986 start for a new GATT round likely,
although agreement on a launch date may not come
until after the Bonn Summit. The interval between
the Summit and this summer's meeting in GATT
will probably be taken up with developed-country
efforts to broaden participation. The commitment
in last month's EC ministerial declaration to enlist
support from developing countries for the new
GATT round promises greater European efforts in
this area. Many developing countries have probably;
been watching the EC- particularly France-as a
barometer for the new round and now may be more;
open to arguments for LDC participation
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Nicaragua:
Oil Problems and Prospects
Nicaragua has experienced five serious oil short-
ages since mid-1984; the closure of its only refinery
in February-because of a lack of crude-marked
the worst oil crisis in 20 years
The US Embassy reports public transpor-
tation was nearly at a standstill during late Febru-
ary and early March after almost all gas stations
were shut down and hundreds of cars were aban-
doned. there was
no oil for farm and other types of machinery and no
fuel to transport workers during the critical final
phase of Nicaragua's coffee and cotton harvest. On
.the basis of press and US Embassy reports on the
severity of the shortages, we believe the military
also experienced spot operational shortages, even'
though it was allocated a greater share of the
country's oil supplies than its normal level. Mana-
gua faces the prospect of further, potentially seri-
ous shortfalls even as its dependence on Soviet
deliveries and Cuban technical expertise. is likely to
continue to grow.
Dependence on Imports
Nicaragua has no domestic crude oil resources, and
its one refinery is capable of processing only 80
percent of the country's petroleum product needs.
As a result, Managua imports all of its crude oil
and some additional petroleum products, including
transportation fuels, kerosene, and petrochemicals.
Because petroleum product reserves are low and
domestic storage capacity is limited, Nicaragua
depends on frequent deliveries of petroleum prod-
The Sandinistas' hard currency bills for oil imports,
however, have been greatly cushioned by conces-
sional financing from first its Latin and later its
Soviet suppliers. Under the terms of the San Jose
Accord, beginning in August 1980, Mexico and
Venezuela offered a stable supply of subsidized
crude oil to Nicaragua, as well as to other Central
American and Caribbean countries. In mid-1982,
however, Venezuela stopped deliveries because the
Sandinistas had fallen behind on their payment
obligations.
Even
though Mexico received only occasional token pay-
ments, it initially increased deliveries to take up the
slack for what we believe are political reasons.
From mid-1982 to late 1983, Mexico covered virtu-
ally all of Nicaragua's requirements.
Mexico City toughened its terms in early 1984 in
an effort, we believe, to give more balance to its
Central American policies, to encourage Managua
to moderate its hardline position on regional issues,
and to respond to increasingly vocal conservative
elements in Mexico. As a result, deliveries became
less frequent, and its shipments of crude oil and
refined products dropped from an average of just
over 10,000 b/d in 1983 to only one shipment of
crude so far in 1985. To downplay political goals,
Mexico City has publicly emphasized that it will
not resume its role as a long-term oil supplier until
Managua pays the more than $500 million it owes
for past shipments.
Soviets Take Up the Slack
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In 1985 the USSR will supply almost all of Nicara-
gua's petroleum requirements either directly or 25X1
through arrangements with Cuba. Soviet petroleum
shipments to Nicaragua began in December 1983,
and during 1984 Soviet deliveries matched those
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POL Entry Ports and Transshipment Routes
'Hon duras
El
*TEGUCIGALPA
Golfo de
Fonseca
Refined
product imports
ego "e
ml Puerto
Crude oil $andino \ 1 `
imports \\\
Puerto Isabel
Nicaragua
Crude oil
pipeline
r2~k ns p
C} , Lago de
Nicaragua
`EI Bluff
Caribbean
Sea
North
Pacific
Ocean
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19 April 1985
~fno
Costa Rica
Bounds y presentation Ya.
no4neceasardy authoritative:,...`
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Nicaragua: Oil Imports, 1984-85
0 Feb
In addition to assuming responsibility for the bulk
of Nicaragua's oil needs, Moscow-in a marked
departure from its typical commercial policy-has
permitted Nicaraguan oil payments to lapse. Al-
though we do not know the details of oil sales
terms, Moscow has required at least token payment
in Nicaraguan commodities including cotton, cof-
fee, and other farm products
In view of Nicaragua's precarious
financial position, the Soviets probably believe that
the Sandinistas will be unable to make significant
payment for years.
Feb
1985
Looking To Share the Burden
Even though the burden on the Soviets is small-at
world prices, 1984 Soviet deliveries would have
been valued at $60 million out of total hard
currency oil export earnings of about $15 billion-
Moscow has been searching for alternate or lower
cost suppliers to Nicaragua. To provide the
amounts of oil Managua requires and save trans-
portation costs, Moscow has attempted to get other
regional sources-Venezuela and Ecuador-to sup-
ply crude oil and petroleum products to Nicaragua
in return for Soviet deliveries elsewhere.F
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19 April 1985
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Nicaragua: Imports of Crude Oil and Oil Products,
By Supplier, 1974-84
Percent
Others
Netherlands Antilles
Mexico
USSR
100
80
60
40
20
In addition to coping with uncertain deliveries,
Nicaragua's petroleum infrastructure is plagued by
a limited distribution system, inefficient refining
capabilities, and a lack of skilled managers0
because of financial
constraints and mismanagement, the Sandinistas
are not properly maintaining plants, equipment,
and the transport system.
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19 April 1985
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Secret
Transportation and Storage
owner, however, still provides top management and
technical services,
The petroleum distribution system has been partic-
ularly susceptible to disruption
For example, all crude enters at Puerto
Sandino and is piped 56 kilometers to the refinery
in Managua. The crude storage tanks located at
both ends of-the pipeline can hold less than two
months of the refinery's crude requirements. No
alternative to the pipeline exists;
Corinto-the only port that can handle large tank-
er loads of refined oil products-can store no more
than approximately one month's supply. Corinto's
petroleum facilities were designed to supplement
the refinery by allowing imports of specialty prod-
ucts and providing some additional distribution
capacity. Its remote location limits the extent to
which trucks can distribute petroleum products
around the country.F___~
Another logistic bottleneck involves moving petro-
leum products to Nicaragua's east coast. Fuel is
trucked from the refinery to the interior port of
Rama and then shipped by aging barges to the
Caribbean ports, which serve as regional distribu-
tion points for the fishing industry, military instal-
lations, and Nicaragua's mining sector.F
Refinery Deterioration
before the latest
shutdown on 13 February, Nicaragua's refinery
was operating at only two-thirds of its 15,000-b/d
capacity. Built and maintained by its foreign own-
er, the refinery is now closely regulated by Pe-
tronic, the Nicaraguan state oil company. The
Nicaragua's Oil Situation in 1985
Nicaragua will probably suffer periodic disruptions
of oil supplies throughout the remainder of 1985.
We expect the current state of disrepair of the
refinery, pipelines, and transportation system to
occasionally disrupt processing and distribution, 25X1
even if there are no unexpected crude import
problems.
gency plans to address this concern.
We believe Nicaragua's biggest challenge will be
keeping the refinery open. If the current owner sells
the refinery to the Sandinistas, Nicaragua will need
to depend increasingly on Cuban and Soviet finan-
cial and technical assistance. We see no evidence 25X1
that Moscow or Havana, as yet, have made contin-
If, through gross Sandinista mismanagement, me-
chanical failure forced the refinery to close down
for two months or more, the consequences to the
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Nicaraguan economy would be: disastrous. Petro-
leum shortages would virtually eliminate. public
transportation,,disrupting food distribution. There
would be no oil. for agricultural or. industrial ma-
chinery, which would severely-limit exports. De-
mand for fuel from both~the.private.sector and the
military. would overwhelm Nicaragua's ability to
distribute refined petroleum products from the
import terminal of Corinto..The Sandinistas would
probably be forced to reduce military fuel reserves
and cut back sharply on civilian allocations.
In our view, the economic impact of future short-
ages on Nicaraguan industry and agriculture will
increase over time even without unusual disrup-
tions. With Managua's announced :goal to elimi-
nate the counterinsurgency this.year,.we expect
military priorities to:further divert.oil supplies from
the civilian sector. As a result, industrial and
agricultural output will. continue to: decline and
erode living standards further.
Long-Range Outlook for Soviet Supplies
We believe the USSR will continue to provide
Nicaragua with the bulk: of its.oil needs and allow
Managua a very lenient payment :schedule to try to
help the Sandinistas get. through the next few
difficult years. The recent decline in the USSR's oil
production probably makes the relatively small cost
of supplying oil to Nicaragua appear slightly more
Secret
19 April 1985
worrisome to Soviet planners. At the same time, in
our assessment, the Kremlin will redouble efforts to
entice Venezuela and Ecuador into oil swap deals
and encourage Mexico to. renew its.support. While
Soviet economic planners will probably.be. anxious
to avoid a large, multiyear commitment to Nicara-
gua, in.our judgment, the political imperative of
maintaining the Sandinista regime in power would
overrule. economic considerations. An adequate
supply of petroleum is critical for Sandinista mili-
tary operations. The Kremlin can also reap propa-
ganda dividends and strengthen its credentials as a
-reliable ally by.advertising its role in helping the
Nicaraguans overcome the adversities that Mana-
gua claims are caused by US aggression.
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Guyana:
Economic Troubles Portend
Closer Communist Ties
Despite Guyana's wealth of resources and official
claims of recent progress, the country's economy is
in a shambles. We believe that output plummeted
about 10 percent in 1984 to barely 60 percent of
the peak 1976. level. Exports of bauxite, alumina,
sugar, and rice have been hurt by low world
demand and excess production, pervasive corrup-
tion, mismanagement, and costly labor disputes.
Meanwhile, President Forbes Burnham, unable to
attract much-Western aid and investment, has been
exploring an alliance with his Marxist-Leninist
political opposition, apparently in the hopes of
gaining Soviet Bloc economic assistance. Even if a
coalition government materializes, however, the
outlook for Guyana's economy is bleak.
A Beleaguered Economy
Guyana's depression represents the steepest eco-
nomic decline of any Latin American country over
the past eight years. Since 1976, Burnham has
responded to the economic difficulties by expand-
ing state-control. The private sector's share of
production is now only about 15 percent. Guyana's
public finances have deteriorated. The economic
slump and flourishing black market-have slashed
government revenues. At-the same time, rising
interest payments,- growing losses in unprofitable
public corporations, large consumer subsidies, and
long-delayed wage. hikes have swelled government
expenditures. Since.foreign financing has almost
completely dried up in recent years, the deficit has
been financed by borrowing from the.-domestic
banking system and by -printing money.
At the same time, lagging export earnings and a
chronic inability to obtain budgetary support from
international financial institutions have crippled
the country's ability to finance much-needed im-
ports or repay its foreign debt. As a result, Guyana
Guyana: Real GDP Growth, 1976-84
has been forced to implement stringent import
restrictions, exhaust its foreign reserves, and build
up large payment arrears in an attempt to make
ends meet. External debt, which stood at $700
million at the end of 1982, climbed to $1.3 billion
by December 1984.
Despite the grave economic plight, Burnham has
been unwilling to take sufficient austerity measures
to regain funding from international lenders. Past
IMF programs have foundered on Guyana's repeat-
ed failures to meet agreed-upon fiscal and mone-
tary targets; the last agreement in 1982 came
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unglued after only three months. Burnham's refus-
al to undertake extensive economic restructuring,
including a steep devaluation of the currency and
revival of the private sector, has been a major
obstacle in obtaining a new IMF accord. We
believe that Burnham fears these measures would
directly threaten his Afro-Guyanese power base-
whose loyalty he has ensured with favors, privi-
leges, and jobs in the public sector. Moreover, any
revival of the private sector would disproportionate-
ly benefit the commerce-oriented Indo-Guyanese
community, which makes up slightly over half of
the population.
Because the Inter-American Development Bank
(IDB) has attached fewer strings than other poten-
tial Western donors, it is Guyana's only remaining
source of sizable foreign funds and only interna-
tional lender with which Guyana is current in its
obligations. According to the US Embassy, the
IDB last June planned project aid to Guyana worth
$30-40 million annually during 1984 and 1985.
The IDB also has continued work on a $40 million
irrigation project.
The economic unraveling has drastically reduced
living standards for most Guyanese. The inflation
rate is now roughly 30 percent annually, and the
unemployment rate exceeds 25 percent. Endemic
shortages of food, drugs, transportation, electricity,
and water worsened in 1984. The educational
system, once the Caribbean's best, has disintegrat-
ed.
basic survival increasingly consumes the
attention of most Guyanese who traditionally have
looked to emigration, not political action, as the
solution to their misery. As a result, we believe that
Burnham is increasingly aware that, unless he can
improve the country's economic performance, he
risks losing support even among Afro-Guyanese.
Tilting Leftward
Although Burnham's relations with Cuba and the
USSR traditionally have been characterized by
mutual suspicion, recent trends have generated
Secret
19 April 1985
greater interest on both sides in expanded ties.
Guyana's collapsing economy and inability to gar-
ner much Western funding have prompted Burn-
ham since 1982 to turn increasingly to the USSR
and its allies for aid.
Burnham reportedly is exploring
the possibility of a coalition with Cheddi Jagan, the
leader of Guyana's People's Progressive Party. In
our view, Burnham may be raising the specter of a
coalition with an eye toward its effect on both the
West and Moscow. He may hope that the prospect
of Jagan sharing power would prompt the United
States to offer Guyana incentives-such as softer
IMF terms
the same reason, he may hope that Venezuela,
Brazil, and other Western donors would step up
their economic assistance. As for the Soviets, Burn-
ham may hope that they would abandon their
parsimony in the expectation of making progress in
uniting leftist forces in the region.
Moscow and Havana so far have shown little
inclination to provide significant economic aid to
Guyana. Since the early 1970s, Moscow and its
allies have disbursed roughly $60 million in eco-
nomic aid, compared with $315 million from West-
ern bilateral and multilateral sources during 1980-.
83 alone. Nevertheless, relations are expanding,
albeit slowly. The Soviet presence reportedly has
been stable in recent years but may grow as a result
of a recent Soviet agreement to provide a transport
aircraft, several helicopters, and related pilot train-
ing. For their part, the Cubans have courted Burn-
ham more actively in recent months than at any
time since establishing relations in 1972. The Cu-
ban presence has grown to about 80 officials,
mainly civilian advisers working on new agricultur-
al or medical projects. Still, we believe Cuba's
economic troubles and distrust of Burnham will
limit Havana to only small amounts of aid, security
force training, and scholarships.
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Guyana: Western Aid Disbursements, 1980-83
Bilateral:
R us
? UK
Netherlands
Other
Meanwhile, other Communist and radical states
are becoming more heavily involved in Guyan i.
His primarily
engaged in economic development projects. East
Germany recently agreed to accept bauxite in
exchange for development aid.
For its part,
Tripoli, at present, assigns no more than 10 Liby-
ans to its Islamic Cultural Center and to two
agricultural joint ventures with Guyana.
Burnham would likely agree to a coalition govern-
ment with Jagan's party if he believes it is to his
political and economic advantage. He especially
would weigh the benefits and risks of Western-
versus-Communist aid. An agreement with the
IMF probably would reopen other Western financ-
ing and produce faster economic results than Soviet
Bloc aid. Therefore, Burnham probably would try
to extract sizable economic and possibly military
aid from the Soviets and Cubans before allowing
Jagan to assume a formal government role. Burn-
ham might also hope that such an arrangement
would undermine Jagan's political standing by
having him share the blame for continued economic
hardship and any subsequent repressive measures,
such as strike breaking, that become necessary.
Regardless of the prospects for a coalition govern-
ment, the outlook for Guyana's economy is poor
over the near term at least. The progressive deterio-
ration of capital stock, emigration of skilled labor,
and erosion of farmland fertility probably will
continue unabated. In addition, international mar-
ket trends point to another bleak year for Guyana's
major money earners:
? Foreign exchange stringencies and lagging world
demand signal continued problems in the bauxite
industry. Output and sales of refractory-grade 25X1
bauxite may improve in 1985, however, under a
March agreement with a US firm to provide $80
million in new investment as well as technical and
marketing assistance.
? World prices for rice are likely to remain weak
this coming year. Moreover, the depletion of
domestic rice stocks last year leaves little avail-
able for export this year, even if the rice harvest is
better than anticipated.
? Sugar sales should fare no better. Industry ex-
perts expect world sugar prices to stay weak over
the near term, and production difficulties- 25X1
caused by prolonged shortages of fertilizers-will
also hamper Guyanese sales.
At present, the prospects for an IMF agreement,
and subsequent access to other Western concession-
ary and commercial lending, are dim. According to
Guyana's Finance Minister, even if a strenuous
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Guyana: Selected Commodity Production,
1977-84
300
a Estimated.
b Projected.
effort were made, Guyana would still be $9 million
short of paying off its debt to the Fund in 1985. He
also has cautioned that, although dialogue contin-
ues with the IMF for a $150 million credit, Guyana
has been advised that Fund resources would be
unavailable in the near future. The Finance Minis-
ter has also warned that hoped-for EC assistance to
the bauxite industry might be linked to the conclu-
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19 April 1985
In these circumstances, the hardships of the vast
majority of Guyanese are likely to deepen this year
as supplies of basic foods and services continue to
shrink. Rice and milk shortages are likely to occur
in the coming months. In addition, Trinidad's
growing economic difficulties apparently are
prompting it to reconsider its oil supply arrange-
ment with Guyana. Should Trinidad harden its
credit terms, Guyana's already inadequate fuel and
electricity supplies probably would be further re-
duced. In our view, the likely response to this
deepening misery will continue to be emigration,
not rebellion.
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New Zealand:.Lange Turning the
Economy Topsy-Turvy'
Although the ANZUS controversy has dominated
press coverage, we believe the electorate will judge
Prime Minister Lange's Labor government accord-
ing to its progress on the economy. Since the
election last July, Labor has set in motion sweeping
changes geared to improving New Zealand's inter-
national competitiveness. Lange's reform plan,
however, has angered New Zealand's largest inter-
est group-the farmers. Reforms proposed by
Lange's conservative team of economic policy mak-
ers also rankle many of the Labor Party's tradition-
al supporters, who favor protecting domestic indus-
try and jobs. Thus, party infighting may prove to be
Lange's political downfall-especially if the econo-
my sputters-and he could easily turn out to be a
one-term prime minister when elections are. held in
1987.
Responding to the Challenge
Under former Prime Minister Muldoon (1975-84),
government policies led to the growth of inefficient
manufacturing industries, such as automobile and
electrical equipment assembly, and farming for
already oversupplied international agricultural
markets. Furthermore,. government intervention in
the wage-setting process, including awarding
across-the-board. wage increases without regard for
skill content of the job or demand for the product,
resulted in a high degree of work force rigidity.
We believe Lange-elected on pledges to rekindle
the economy-fully appreciates the magnitude of
his challenge. Since the Labor Party came to
power, Lange's economic technocrats have imple-
mented a series of far-reaching reforms, including
devaluing and later floating the New Zealand
dollar, removing price and interest rate controls,
and liberalizing restrictions on international flows
of capital. In addition, the government's first bud-
get-submitted in November 1984-attempts to
reduce the budget deficit and encourages interna-
tional competitiveness by raising taxes and charges
for government services, reducing farm subsidies,
and lowering import barriers. The reform agenda
also includes limiting the power of the trade unions
and overhauling the tax system.
At first, the public credited the new Labor govern-
ment with acting decisively, and in September-
after Lange's carefully planned and brilliantly exe-
cuted domestic economic summit of government,
business, and labor leaders-both Labor and Lange
received their highest popularity ratings ever.
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Since then, however, the road has been rockier.
Reaction to the November budget was sharp, im-
mediate, and mostly critical. Although opposition
to the budget has been tempered by the widespread
realization that Muldoon's government left the
country with serious economic problems, every
interest group has voiced a complaint about partic-
ular provisions. Farmers estimate that they are
asked to absorb more than 25 percent of the
government's deficit reduction; retirees have bris-
tled at the new surtax on their assets; union leaders 25X1
are infuriated because they had expected broad tax 25X1
relief in return for their promises of moderate
demands in the December wage round. Conse-
quently, public opinion polls have shown, a sharp'
drop in Labor Party support.
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Money, Credit, and Debt:
New Zealand Down, But Not Out
The Labor government faces continuing problems
in managing external finances. Public-sector debt
has reached approximately US $16 a billion, with
foreign obligations totaling about US $9 billion,
according to the US Embassy. The country's.debt
to GDP ratio has placed it on par with such debt-
ridden nations as Brazil and Mexico, and its credit
rating has been lowered twice since 1982 by inter-
national rating services. Annual debt service is
currently equal to about 20 percent of government
revenue, and limits Labor's monetary and fiscal
policy options.
Beginning with the July devaluation of the New
Zealand dollar, Finance Minister Douglas has
introduced a series of measures to strengthen the
financial sector. Partly for this reason, New Zea-
land has had no trouble financing a current ac-
count deficit that, according to the US Embassy_
increased by US $330 million last year to US $1.4
billion in December 1984. Its imaginative debt
rollover in September impressed many foreign
economic analysts; one long-term and three short-
term credit lines were created, each providing a
full US $1.4 billion.
The volatility of the New Zealand dollar in Febru-
ary 1985 possibly caused by fear of US trade
sanctions in the wake of the ANZUS crisis-
encouraged Douglas to announce on 4 March the
float of the dollar he had been preparing for
months. The float has produced no marked revalu-
ation, and the stability of the currency since then
has allowed Douglas to fend off criticism that it
would harm exporters and risk external .manipula-
tion of the exchange rate.
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19 April 1985
Undaunted, Lange and Finance Minister Douglas
are now aiming their reformist guns at the trade
union movement. Although the government has
been unable to escape its campaign promise to
reinstate compulsory unionism, Douglas has had
partial success in implementing labor market .re
forms. Union and business representatives have
approved a new, more. flexible framework for wage
negotiations that:
? Encourages enterprise- and industry-level
bargaining.
? Responds to supply and demand for particular
skills.
? Takes into account changes in job content, in-
cluding technological improvements that result in
greater productivity.
? Reduces the government's role and increases.the
roles of the Arbitration Court, employers, and
local union organizations.
Although wage settlements in the-last few months
have been, moderate, averaging about 7 percent,,
we judge that Lange will face a serious challenge
in the September round of wage negotiations.
Inflation-currently about 12 percent-is erod-
ing purchasing power, and the next round offers
the unions a convenient forum to express displea-
sure with the government's overall economic pro-
gram.
Lange's government has begun a major overhaul
of the entire tax structure. Early.this month,
Douglas introduced a. bill for a broadly based
value-added tax. According to Douglas, the pre-
sent.system of steep marginal income tax rates
discourages productive investment and risk tak-
ing, leads to tax avoidance, and is ineffective in
collecting revenue.
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Douglas also intends to remove distortions in
energy pricing and has begun by putting local
energy industries on a commercial basis with
consumers bearing full costs. Future energy pro-
jects, he says, will have to operate without the
government subsidies they received during Mul-
doon's years.
Although we believe reform eventually will im-
prove export competitiveness and economic
growth, the next two years will see an industrial
shakeout, as Lange curtails large scale subsidies
to industry, inevitably leading to job losses. With
the uncertainty surrounding. economic reform, job
creation will probably be insufficient to absorb
displaced workers. Industrial relations will be
tense, as Lange publicly acknowledges, but New
Zealanders are usually not very tolerant of high
levels of strike activity. For this reason, we
believe, the government may be persuaded to
reintroduce some subsidies and import barriers to
quiet labor protests.
The government's policies aim for an export-led
economy competitive in world markets. Trade
union leaders charge that this implies a low-paid
labor force and exposes New Zealand. to the
vagaries of demand and inflation of the global
economy. They contend that the best course is to
stimulate the domestic economy and continue to
protect local industry and jobs.
In our judgment, the government would be able
to live with union opposition if sustained econom-
ic growth on the order of 3 to 4 percent annually
could be achieved. With the prospect of two or
three years of little or no growth, however, Lange
can expect a serious challenge from the rank and
file as well as from union leaders. Labor Party
leftists will continue to be Lange's biggest worry,
exasperated by his forsaking of the party's tradi-
tional interventionist, job-protective, and welfare-
oriented approach to economic policy.
Outside his party, Lange also faces increased
pressures from a refurbished National Party. We
see two primary causes for the National Party's
rebound:
? Subsidy cuts will squeeze out marginally profit-
able farms. Many farmers-generally a National
constituency-supported Lange in the last
election.
? Support for the free-market-oriented New Zea-
land Party-formed in 1983 by businessmen,
professionals, and some farmers disenchanted
with Muldoon-has significantly dropped since
he was ousted, with many of its voters returning
to the National camp.
Moreover, if the economy sputters, as seems likely,
Lange will undoubtedly lose the votes of some of
his Labor supporters. Their votes-plus the return
of businessmen, professionals, and disgruntled
farmers to the National Party-could cost him and
the Labor government the 1987 election.
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OPEC March
Oil Production
Energy
first-quarter output was down by 2 million b/d-or over 10 percent.
OPEC produced an average of 16.8 million b/d of crude oil in March, only
slightly below February levels. The only significant gainer was Iran, which
upped production an estimated 100,000 b/d. Most other OPEC members
remained at or slightly above their quotas with the exception of Nigeria, which
continued to produce about 400,000 b/d above its allocation. Losers for the
month were Saudi Arabia and Kuwait. For first quarter 1985, total OPEC
crude oil production averaged approximately 400,000 b/d above the ceiling
established in October of last year. From year-earlier levels, however, OPEC
Oct
Quo
ober 1984
ta
1984
1985
January
February
March
First
Quarter
Total 16.0
0
17.7
15.5
16.9
16.8
16.4
Algeria 0.6
6
0.7
0.7
0.7
0.7
0.7
Ecuador 0.1
8
0.3
0.2
0.2
0.3
0.2
Gabon 0.1
4
0.2
0.2
0.2
0.2
0.2
Indonesia 1.1
9
1.4
1.3
1.3
1.3
1.3
Iran 2.3
0
2.4
1.8
2.3
2.4
2.2
Iraq 1.2
0
1.2
1.3
1.2
1.3
1.2
Kuwait 0.9
0
0.9
0.9
1.0
0.9
0.9
Libya 0.9
9
1.1
1.0
1.0
1.0
1.0
Qatar 0.2
8
0.4
0.3
0.3
0.3
0.3
Saudi Arabia 4.3
5
4.4
3.3
3.8
3.6
3.6
UAE 0.9
5
1.2
1.1
1.2
1.2
1.2
Venezuela 1.5
6
1.7
1.6
1.6
1.6
1.6
a Neutral Zone has no production quota; output is divided evenly
and added to Saudi and Kuwaiti totals.
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Mexico Planning
Transisthmian
Oil Pipeline
foreign assistance.
PEMEX is planning to build a second pipeline across the Isthmus of
Tehuantepec with Japanese assistance as part of an effort to increase exports
to the Asian market. President de la Madrid has approved the project, which is
scheduled for completion in 1988. The new pipeline will be capable of
transporting a maximum of 600,000 b/d of heavy Mayan crude oil from the
Gulf of Mexico to the Pacific Coast port of Salina Cruz. Japan receives 80 per-
cent of its lifting in higher priced Isthmus crude through Salina Cruz. It has
expressed interest in taking more Mayan crude that currently must be picked
up in the Gulf, substantially boosting transport costs. The Mexicans are asking
for Japanese financial assistance in the construction of the pipeline and loading
facilities. The cost of the pipeline alone will be about $500 million, and,
because of budgetary constraints, the Mexicans are unlikely to build it without
New Delay in Ithe IMF concluded last week that Manila
Philippine Financial missed meeting several monetary and economic policy targets under its $615
scue Package million balance-of-payments loan. The Fund plans to establish new perfor-
mance targets for the end of May in an effort to put Manila's economic
adjustment program back on track. As a result, $160 million in disburse-
ments-originally scheduled for release in March and May-will be postponed
at least until July. Furthermore, even though a breakthrough is likely in
negotiations on the long-stalled financing package from Manila's commercial
creditors, new bank loans will be withheld until the IMF resumes its
disbursements. Despite the missed targets and delayed disbursements, the
IMF believes the Philippine adjustment program is still viable.
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Secret
Japan's Unions Win
Bigger Wage Boost
National Developments
Possible Japanese
Limit on
OrangelIinports
Developed Countries
Major Japanese unions have negotiated wage increases of between 3.9 percent
more than offset the increased wage costs for most Japanese firms.
and 5.6 percent for FY 1985, which began 1 April. The pay hikes-slightly
higher than last year's-put an end to this year's annual spring wage offensive.
The "shunto" was relatively quiet; for example, Japan's railway unions called
off their planned strike after a last-minute settlement better than that of 1984.
Higher pay rates should provide some stimulus to private consumption, which
lagged GNP growth last year. Recent improvements in labor productivity will
Japan's imports.
MITI appears likely to reduce Japanese imports of US citrus by invoking the
"extraordinary circumstances" provision of its recent import allocation policy
for this summer's fresh orange imports. The new policy, announced on 5
March, permits importers to import less than their quota in one year and still
receive a full allocation the following year. According to the US Embassy, an
Agriculture Ministry official claimed that the Japanese regarded this year's
California orange output-although 73 percent greater than last year-as
tantamount to "a crop failure" because much of the fruit is smaller than
Japanese consumers prefer. Importers, who claim heavy losses last summer
because of high US prices and the requirement to use their full quotas, have
pressed MITI and the Agriculture Ministry to implement the policy. A
cutback in the 104,000 metric tons of oranges agreed upon in 1984 bilateral
negotiations would be a setback to Prime Minister Nakasone's effort to boost
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France'Further
Libalizes Financial
arkets
The Finance and Economics Ministry recently announced new measures to
free financial markets. A market for stock options will be created and,
previously fixed, stock market commissions will now be negotiated within
government-set limits. Corporate financing will be facilitated because the
1-percent tax on new stock and bond issues will be eliminated, and the ceiling
on issues that can be made without government approval will be doubled to
about $100 million (FF 1 billion) per year. These measures, the previous easing
of credit and exchange controls, and the introduction of certificates of deposit,
all indicate the Socialists' determination to make the financial sector more
market oriented. Further reforms of exchange controls and improvements of
mortgage financing are expected in the next few months.
Spain Approves Madrid has approved legislation to introduce the value-added tax (VAT) next
Vgfe-Added Tax year in order to comply with promises to eliminate illegal subsidies under the
short lived.
GATT and to prepare for entry into the EC. Spain must contribute part of its
VAT revenues to the EC after it becomes a member of the Community. A
VAT will simplify the Spanish tax system by replacing 23 business taxes and
will do away with the export tax rebate system. In the meantime, Madrid has
lowered export tax rebates 15 percent for the second time since 1984. The
switchover to the VAT will help reduce budgetary pressures and its inflation-
ary impact-an estimated one-time, 2-percentage-point increase-should be
Less Developed Countries
Saudi Payment for On 3 April, Soviet Deputy Foreign Trade Minister Zhuravlev acknowledged
/Soviet Arms publicly for the first time that Saudi Arabia was supplying oil to the USSR as
Shipments to Iraq payment for Iraqi debt to Moscow-an arrangement apparently begun in
to partially finance current Soviet military shipments to Iraq. During 1984
Soviet military shipments to Iraq totaled $1.8 billion, while Saudi oil
shipments on Iraq's behalf were worth about $360 million. Substantial arms
shipments are again expected this year as the Iran-Iraq war continues.
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19 April 1985
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Secret
Egyptian Foreign
Exchange Rules
i
elaxed
Jordan Moves To
Open,'Economy
growth.
Cairo last week announced substantial changes in the strict controls, adopted
last January, on foreign exchange and imports. Private-sector importers will
again be allowed to open letters of credit in foreign currency, in effect
restoring the important role of nonbank foreign exchange dealers. Foreign
branch banks will be permitted to resume issuing of letters of credit. Other 25X1
changes include a relaxation of import controls and greater flexibility for
banking officials in keeping the official exchange rate competitive with the
black-market rate. The new rules, which follow recent changes in high-level
Egyptian economic leadership, further Cairo's long-term plans to decontrol the
economy and make it more responsive to market forces 25X1
Jordan's new government has moved quickly to reduce its role in the economy.
Amman has canceled plans to require Jordanian majority ownership of all
banks and eliminated rules governing operating hours for private businesses. In
addition, Jordanian press reports indicate that some price controls may be
removed. These moves are not major in themselves but signal that Amman is
serious about boosting the private sector. Jordan depends heavily on aid and
worker's remittances from Arab countries, but economic difficulties in these
states are prompting Amman to promote alternative sources of economic
North Yemen Floats The North Yemeni Government, under pressure from the country's bankers,
,,the Riyal has decided to float the riyal. Bankers expect a devaluation of roughly 17
percent. the government hopes the
floating rate will enable it to ease import restrictions, which were imposed in
1983 because of the overvalued riyal. In addition, by ending support of the ex-
change rate, Sanaa probably expects to conserve scarce foreign exchange
reserves that fell to an alltime low at the end of 1984.
L-Y SSR Threatens
Economic Assistance
to Pakistan
reprisals is part of Moscow's tougher line with Pakistan since mid-1984, but
these recent developments seem designed more for political effect. The Soviet-
financed steel mill is largely completed, and steel-related projects are a small
portion of the roughly $300 million in economic aid promised in late 1983.
Earlier this month the Soviet Ambassador reiterated Moscow's promise to
build an electric power station in Pakistan. If the Soviets withdrew their
technicians and stopped delivering spare parts, however, Pakistan would have
problems operating the steel mill
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19 April 1985
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New Pakistani Finance The appointment of Mahbubul Haq as the Minister of Finance and Planning
M' ister Seeks may lead to domestic economic reforms. A professional economist, he favors
eforms an overhaul of the tax system, a more productive use of savings, agricultural
reforms, deregulation of industry, and decontrol of cooking oil and fertilizer
prices. The World Bank, IMF, and the United States have been pressuring
Pakistan for many of these measures. Any new reforms, however, are likely to
be cautious because the conservative former Finance Minister, Ghulam Ishaq
Khan, retains considerable influence as Chairman of the new Senate. More-
over, President Zia is not likely to sanction any radical moves that would
alienate the general population or the large bloc of landlords and conservatives
in the new assembly.
Tu tsia's Economic Official figures show continued erosion in Tunisia's economy last year.
P rformance Mixed Overall, real GDP growth was up slightly to 5.5 percent with a strong rebound
in agriculture hiding continued weakness in petroleum, tourism, and phos-
phates-mainstays of the economy. Export growth accounted for only 15
percent of the increase in GDP. The current account deficit jumped nearly 40
percent to $900 million requiring foreign borrowing of $740 million and a
drawdown of reserves. Debt service edged close to 20 percent of exports.
Concern over the economy has caused Tunis to take stern measures to cut
consumption and reduce spending, according to the US Embassy.
Yeforming Senegal's
conomy
lished policies.
President Diouf has recently abandoned government policies in place since
independence and announced far-reaching changes in agricultural policy that
include the removal of government subsidies, the dismantling of government-
sponsored marketing cooperatives, and new free market incentives to produc-
ers. Senegal's long-term economic problems and IMF-supported austerity
program have driven Diouf's popularity to a low ebb. The President appears to
be trying to regain some support by increasing incentives to farmers and
reducing subsidies to middlemen. His moves, however, risk alienating the
Islamic brotherhoods that control agricultural trade and benefit from estab-
ub-Saharan Weather in Botswana and Mozambique and poor agricultural policies in
Agricultural Lesotho will hold grain harvests substantially below normal again this year,
Problems Continue according to US Embassy reporting. Botswana's drought is in its fourth
consecutive year, with seasonal rainfall averaging about 35 percent, and in
some areas 60 percent below normal. Total crop production is expected to meet
only about 5 to 10 percent of national requirements. Drought has ended in
much of Mozambique, but flooding has hit southern and central parts of the
country. Crop losses are expected to be heavy, and Maputo has appealed for
aid, especially for hard currency reconstruction funds. In Lesotho, the 1985
corn harvest is expected to be less than half that of last year, according to Em-
bassy sources. To reduce dependence on South Africa, Lesotho last year halted
the spraying of herbicides and insecticides by South African agricultural
consultants. Maseru plans to reinstitute the spraying in a limited area for the
Secret
19 April 1985
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Secret
M xico Backslides
on Trade Reforms
Mexico City's new export promotion plan, announced last week, falls far short
of trade liberalization measures outlined in Mexico's 1985 IMF program.
Instead of a specific program, the government merely reaffirmed current
programs and the need to phase out import licenses. Strong opposition from
Under Secretary for Industrial Planning de Maria y Campos and the country's
long-protected private sector thwarted the President's efforts to encourage
exports by allowing companies unrestricted use of 40 percent of their export
receipts for industrial imports, according to the US Embassy. They successful-
ly argued that this plan would undercut local industry by opening the market
too quickly.
1,Z
Costa Rica Buys
anana Acreage
public confidence pose continuing challenges. The US Embassy reports that
the government-in the wake of a public outcry provoking coup rumors-
replaced the Finance Minister after consultations among private-sector lead-
ers. Mejia was trying to impose reforms, including heavy taxes on coffee and
cotton exports, to prevent further destabilization of the economy. Business
leaders nevertheless publicly have rejected cooperation until Mejia removes
the Ministers of Economy and Energy and Mines, as well as the Central Bank
president. The business community also is demanding that the tax package
totally be revoked, not simply suspended. The selection of a businessman as the
new finance minister is unlikely to mollify business leaders who, as a result,
may renew their call for a general strike. Despite continued support from
senior military officers, Mejia will have trouble coping with such difficulties.
The Costa Rican Government recently bought United Brands' banana planta-
tions on the west coast and will use them to grow other crops including cacao
beans. After 18 months of negotiations, the US firm sold the 4,200 acres and
500 buildings for about $1.24 million to settle earlier contractual obligations.
Worldwide overproduction, tough competition from Latin countries, and
increasing costs made it uneconomical for the firm to continue production.
Despite longer term benefits, the Monge administration's decision to reduce
dependence on banana exports will result in a short-term loss of $40 million
annually in foreign exchange earnings that will hurt debt servicing capacity, at
least in 1985. In addition, the labor market will be adversely affected since the
conversion to cacao requires approximately four years.
Soviet Interest in US Soviet officials have recently indicated to several US firms a greater interest in
,11'P'etroleum Equipment buying a variety of petroleum equipment and have toned down allegations that
US suppliers are unreliable. Possible purchases include pipelayers, oil pumps,
oil-refining technology and equipment, a plant for sour-gas processing, and a
facility to manufacture subsea oil and gas production equipment. Western
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19 April 1985
Economic Problems The suspension of unpopular austerity measures has reduced the immediate
Ahead for Guatemala threat to Chief of State Mejia, but deep-seated economic pressures and failing
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 Zima in West Siberia. The Kursk complex will produce nylon tire cord,
engineering plastics, polyester fiber, and other chemicals. The Zima complex
will double the capacity of an existing facility. West European and Japanese
firms are bidding on the projects that may include US technology. Payment
for these turnkey projects-each worth about $1 billion-will be output from
the plants. These complexes bring the total value of Western chemical
facilities for which the Soviets have asked bids to more than $4 billion and un-
derscore a continuing dependence on Western technology. Exports from these
plants can be expected to intensify already stiff competition in the West
European chemical-market.
oviet Apple The Soviet copy of the Apple II-called the Agat-is a lemon. Soviet
Computer Copy computer experts recently called the machine a failure.
The failure of the Agat is almost certainly a factor in the recent flurry
of Soviet negotiations with US and other Western computer manufacturers for
large quantities of personal computers. In addition to imports, Moscow wants
to obtain manufacturing rights and technology. Although exports in the~Apple
II' class are no longer controlled, all Western computer manufacturing
technology is under strict COCOM embargo.
Vietnam's Economy
Impro> es Slightly
the Vietnamese
economy grew by 5 percent in 1984-about the same as the year before. A 5-
percent increase in foodgrain production to nearly 18 million metric tons
provided the major stimulus, but the production of other crops, light industrial
goods, and electricity also grew. Inflation remained steady at about 50 percent.
Despite these gains, the outlook this year is bleak. Continued rapid population
growth of 2.4 percent will offset much of the increase in food production,
which we believe the IMF has overestimated. According to the US Embassy in
Bangkok, procurement and distribution problems will probably force Hanoi to
import 400,000 to 500,000 tons of rice this year. In addition, a severe foreign
exchange shortage will limit imports of raw materials and equipment needed to
revive heavy industry-now operating at less than 50 percent of capacity-and
the depressed export sector.
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firms bidding as prime contractors for major field development are also
soliciting US suppliers as subcontractors. The absence of rhetoric and the
renewed interest in US equipment are in contrast to the attitudes exhibited last
year, and may be intended to improve both political and commercial relations
before the Joint Commercial Commission meetings in late May. Although
these, considerations suggest genuine interest in US equipment, some of the
overtures may simply be tactical. Moscow routinely expresses interest in_
equipment and often requests price quotations to improve its bargaining
position without any contracts resulting.
Soviets Seek Western The USSR has solicited bids for an integrated fiber complex to be built at
Chemical Technology Kursk and a chlorine, vinyl chloride, polyvinyl chloride (PVC) complex at
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Secret
Secret
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