INTERNATIONAL ECONOMIC & ENERGY WEEKLY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP97-00771R000807570001-5
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 33
• Document Creation Date: December 22, 2016
• Document Release Date: August 19, 2010
• Sequence Number: 1
• Publication Date: June 14, 1985
• Content Type: REPORT

Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000807570001-5
Directorate of S
Intelligence
Weekly
International
Economic & Energy
DI IEEW 85-024
14 June 1985
Copy 6 9 4
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000807570001-5
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000807570001-5
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000807570001-5
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000807570001-5
International
Economic & Energy Weekl
y)
25X1
iii
Synopsis
1
I?erspective-West European Gas Prospects: Limiting Soviet
Opportunities 25X1
25X1
3
Nicaragua: Steps To Counter the US Embargo 25X1
25X1
Mexico: Shortsighted Oil Policies Under de la Madrid
25X1
25X1
11
Bolivia: Grim Export Prospects 25X1
25X1
15
-Chile: Favorable Export Outloo
k
25X1
25X1
19
Sudan: The Limited Role of the Private Sector 25X1
25X1
Energy
International Finance
Global and Regional Developments
National Developments
Comments and queries regarding this publication are welcome. They may be
Secret
DI IEEW 85-024
14 June 1985
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000807570001-5
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000807570001-5
Secret
International
Economic & Energy Weekly
Synopsis
1 Perspective-West European Gas Prospects: Limiting Soviet
Opportunities
The current gas surplus in Western Europe, together with the increased
availability of low-cost Soviet gas, could prevent or delay the development of
Western Europe's substantial reserves needed to meet domestic demand
requirements beyond 1990.
3 Nicaragua: Steps To Counter the US Embargo
Managua is adopting a broad strategy to deal with the US trade embargo
announced in May. While Soviet Bloc benefactors have offered some new aid,
most other donors have given little more than moral support. 25X1
7 Mexico: Shortsighted Oil Policies Under de la Madrid
Mexico is encountering problems meeting its oil development goals because of
financing and marketing constraints. Meanwhile, the country faces a continu-
ing decline in world oil prices that would further erode petroleum revenues.
11 Bolivia: Grim Export Prospects
La Paz needs to increase exports to resume servicing its $4.8 billion foreign
debt, but domestic economic chaos and an unstable political climate preclude
such an effort. 25X1
15 Chile: Favorable Export Outlook
Santiago is now focusing on expanding exports to meet its debt service
obligations, and, despite a setback last year as copper revenues fell, copper will
remain the key earner of foreign exchange. 25X1
private-sector participation in the economy
Sudan's more immediate problems-including IMF arrearanges and the
government's reluctance to adhere to a previously agreed-upon package of
reforms and austerity measures-tend to obscure more fundamental economic
problems. As a first step, we believe Sudan needs to abandon a longstanding
preference for statist economic solutions and move toward more decentralized
iii Secret
DI IEEW 85-024
14 June 1985
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000807570001-5
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000807570001-5
International
Economic & Energy WeeklyF_~ 25X1
Perspective West European Gas Prospects: Limiting Soviet OpportunitiesF____-] 25X1
The current gas surplus in Western Europe, together with the increased
availability of low-cost Soviet gas, could prevent or delay the development of
Western Europe's substantial reserves needed to meet domestic requirements
beyond 1990. Although we expect the West European supply cushion to erode
gradually, market forces may not adequately encourage investors to make the
huge capital commitments to develop alternative supplies promptly. As a
result, Moscow, as the lowest cost supplier with spare export capacity, will
have a golden opportunity to increase its sales in Western EuropeF___1 25X1
Failure to develop acceptable alternatives to Soviet gas could force some West
European countries to abandon their 1983 International Energy Agency (IEA)
commitment to limit gas imports from the Soviet Union. If, over the next few
years, weak demand, the high price of new gas, or stringent tax structures
make development of European supplies unprofitable, market realities dictate
that Western Europe will purchase additional Soviet gas. Under these
circumstances, we believe continental Western Europe could be dependent on
Soviet gas for nearly 35 percent of its gas consumption in the year 2000.
Exports at this level could give Moscow annual hard currency gas earnings, at
current prices, three to four times the 1984 level of nearly $4 billionF____1 25X1
West European countries have several choices if they hope to meet their IEA
commitment:
? Proceed with development of indigenous gas resources. A decision to develop
the Sleipner and Troll gasfields in the Norwegian North Sea would
significantly increase West European production. Because of the five- to 10-
year leadtimes, however, contracts will have to be concluded within the next
few years to meet rising demand beginning in 1990.
? Adapt the Norwegian tax structure to meet the needs of high-cost fields. The
current tax structure is estimated to more than double the price necessary to
make Troll gas commercially attractive, and makes its price too high to
compete with Soviet gas. In the past, Norway has shown flexibility in
response to market conditions.
? Institute or maintain realistic gas-pricing policies, especially in the United
Kingdom. Higher prices would help hold demand below forecast levels, and
improve the outlook for expansion of domestic capacity.
Secret
DI IEEW 85-024
14 June 1985
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000807570001-5
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000807570001-5
? Build a gas pipeline linking the United Kingdom and the Continent. Although
this runs the risk of opening the United Kingdom to Soviet gas, it could force
Oslo to price gas more competitively by increasing both UK and continental
leverage. Furthermore, it could eliminate the need for one or more deepwater
North Sea pipelines.
? Internalize all costs associated with the purchase of Soviet gas. Western
Europe should assess the total costs of Soviet gas, including the expense of
developing and maintaining the storage and surge capacity that would be
required in the event of a cutoff, before buying additional volumes. This
calculation would reduce the price advantage of Soviet gas.
A combination of these options, together with purchases from other non-
OECD sources, could help prevent further Soviet inroads.
Comprehensive regional planning and cooperation, including measures to
accelerate OECD gas supplies on short notice through standby contracts, could
alleviate some of the effects of a potential disruption in Soviet gas deliveries.
Moreover, we believe awareness of such planning might discourage the Soviets
or the Algerians from even attempting an embargo. Until West European
governments view gas supply availability in a regional strategic perspective,
the coordination required to reduce economic dislocations of a supply interrup-
tion is highly unlikely.
Secret 2
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000807570001-5
25X1
25X1
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000807570001-5
Secret
Nicaragua: Steps To Counter
the US Embargo
Managua is adopting a broad strategy to deal with
the US trade embargo announced in May. To
cushion trade dislocations, the Sandinistas have
begun a comprehensive search for new suppliers
and alternate export markets. While Soviet Bloc
benefactors have offered some new aid, most other
donors have given little more than moral support.
With Cuban assistance, the Sandinistas are also
setting up third-country front companies to circum-
vent the sanctions. At the same time, Managua is
using the embargo to deflect blame from its home-
grown economic woes and justify tighter controls
over the economy
Before the Embargo
Before the announcement, Nicaragua had antici-
pated the sanctions and redirected trade away from
the United States. During the past several years,
the Sandinistas aggressively hammered out new
trade pacts with a variety of Communist Bloc,
Middle Eastern, Latin American, and West Euro-
pean countries. Meanwhile, Managua's purchases
from the United States plunged from $247 million
in 1980 to $110 million in 1984. At the same time,
Managua's sales to the United States fell from
$214 million to $58 million.
Much of this decline has been offset by soaring
trade with the Soviet Bloc. In 1980, Managua
imported $1.5 million in merchandise from the
Communists and sold them $8.8 million worth of
commodities. By 1983-the last year for which we
have comprehensive trade data-Managua was im-
porting $135 million from the Bloc and selling
them $57 million worth of goods. According to
preliminary reports, Nicaraguan trade with the
Bloc continued its rapid rise during 1984, with
increased oil from the Soviets leading the way.
At the time of the embargo, President Ortega and
several other official delegations traveled extensive-
ly looking for new trade and aid agreements.
Ortega's announced priority for his trip was to firm
up oil-supply commitments from the Soviets; he
also was seeking new sources for agricultural equip-
ment and pesticides, as well as increased trade and
financial support from West European countries.
During Ortega's visits to West European capitals,
he also requested increased trade and financial
support to offset the sanctions.
25X1
25X1
The Soviet Bloc has been generous in their state-
ments of support, and some new commitments of
trade and aid were forthcoming. According to
official Sandinista announcements, the Soviets as-
sured Ortega of petroleum deliveries representing
80 to 90 percent of Nicaragua's overall oil needs for
the rest of 1985, a policy already in effect before
the embargo. We estimate that this oil is worth
nearly $120 million. In addition, the Soviet Foreign
Trade Bank reportedly extended a new hard cur-
rency loan of around $55-60 million on favorable
terms, and at the same time Nicaragua opened new
letters of credit for $8 million worth of military
deliveries. US Embassy reporting earlier had indi-
cated that Ortega would request $200 million in 25X1
economic aid for 1985, but no new agreements
were announced. 25X1
substantial new aid and 25X1
$20 million, and Romania and Poland donated
debt relief from other Bloc countries to support
increased trade. We believe the sanctions encour-
aged these donors to increase commitments and
accelerate disbursement schedules. During May,
East Germany agreed to double economic aid
disbursements from its 1984 level to $54 million,
Czechoslovakia provided new credits worth around
Secret
DI IEEW 85-024
14 June 1985
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000807570001-5
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000807570001-5
various goods and transport equipment. Mean-
while, Bulgaria agreed in May to accept commod-
ities in repayment of a $6.5 million credit line it
had granted earlier this year, while Czechoslovakia
and Poland deferred principal repayments for five
years
Nicaragua's recent appeals for new West European
aid thus far have been generally unsuccessful,
although these nations have voiced strong opposi-
tion to the US embargo. Only Sweden and Austria
agreed to token increases in trade and aid beyond
already promised levels. Following Ortega's visit,
Spain made public an earlier decision to cut off
export credits, citing growing debt arrearages.
Many Latin American governments, according to
press reports, have agreed to look for ways to assist
Nicaragua in the coming months, but few concrete
measures have emerged. One barrier to expanded
trade is that Nicaragua and these countries export
similar goods. A Mexican-Nicaraguan bilateral
trade commission meeting in late May announced
that Mexico would increase trade, but other reports
indicate that Mexico's private sector is discourag-
ing further official support. Mexico also has agreed
to make some limited oil deliveries, but it is possible
under terms more favorable than those of the San
Jose accord.' Argentina announced that it will send
a delegation to Managua to study expansion of
Export Expansion Difficulties
Efforts to find alternate markets for meat and
bananas, which made up the bulk of exports to the
United States, have met with mixed success. The
Sandinistas announced that they would sell beef to
Canada, but we have seen indications that the
Canadians have decided not to increase Nicara-
guan imports at this time.
Expansion of other exports to both the East and
West continues to be hampered by low output and
poor quality. Disappointing coffee, sugar, tobacco,
and cotton harvests resulted from shortages of
fertilizers and pesticides imported from the United
States Libya,
after examining samples, decided against importing
Nicaraguan-grown tobacco for its cigarette-
processing plant. In recent months, Managua re-
placed its Cuban tobacco advisers with Bulgarians,
which may lead to increased tobacco sales to that
Bloc nation. Press reports indicate that much of
Nicaragua's sugar crop suffers from a rat-carried
plague,
trade credits.
According to Sandinista press reports, Libya, Alge-
ria, and Iran are planning increased oil aid to
Managua, but the details are not clear. In the past,
these countries have allowed Managua to resell
crude on the market for hard currency, and then
have given the Sandinistas several years to make
repayments. Only the heavy Iranian crude could be
used in the Managua refinery. We believe any new
oil support would be in the form of petroleum for
resale on the market, which would help Nicaragua
in its hard currency situation but not affect actual
petroleum supply problems.
'The San Jose accord was set up by Mexico and Venezuela in 1980
to provide oil on concessional terms to countries in Central America
Anticipating the trade embargo, the Sandinistas
began making contingency plans in early 1985 to
move their assets and companies out of the United
States. Following through on earlier plans,
Managua's World Credit Corporation headquar-
ters was moved in mid-May from Miami to Cana-
da. To minimize its susceptibility to an asset freeze,
the Nicaraguan Central Bank has been trying to
keep zero balances in its US bank accounts but has
had difficulties because of poor management.j
25X1
25X1
25X1
25X1
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000807570001-5
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000807570001-5
Secret
Operations of Aeronica, the profitable Sandinista
airline, were hard hit by the embargo
the airline
obtained 50 percent of its hard currency earnings
from US routes. Aeronica has succeeded in estab-
lishing connecting flights in Mexico to serve the
United States and is working on a similar arrange-
ment with an international airline through other
Central American countries. The airline had pur-
chased a large supply of spare parts a few days
before the embargo announcement, and its manag-
ers are making arrangements to pay back debts in
an apparent effort to rebuild the airline's credit
rating should the embargo end.
The Sandinistas, presumably drawing on Cuban
expertise, also are taking steps to evade the US
trade restrictions.
The Sandinistas also hope to channel some of their
exports into the United States through witting and
unwitting firms in Panama, Honduras, and Costa
Rica. Targeted exports would not be readily identi-
fiable as of Nicaraguan origin and would enter the 25X1
United States under various industrial brands. For
example, Tampa-based cigar companies could buy
Nicaraguan tobacco, manufacture cigars in Hon- 25X1
duran factories, and market the cigars in the
United States. 25X1
Domestic Impact
and landowners in local currency.
At home, the Sandinistas have cited the US sanc-
tions in calling for more sacrifice and in tightening
economic controls. During May, the regime stiff-
ened rationing of basic goods, ended payment of
wages in kind, and set up exchange houses to
counter black-market activity in foreign currencies.
Beginning this month, all foreigners will be re-
quired to pay rent and land purchases in dollars to
the Central Bank, which then will pay landlords
production
Domestic industry, already operating at less than
half capacity before the embargo, is suffering
shortages of vital equipment, spare parts, and raw
materials that will cause additional downtime. For
example, the US Embassy reported that mainte-
nance problems had already idled more than half of
Nicaragua's important shrimping fleet and that the
embargo is compounding difficulties in obtaining
parts for US-made boats. Even where the Sandinis-
tas had stockpiled spare parts for key industries,
shortages of imported raw materials are restricting
25X1
25X1
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000807570001-5
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000807570001-5
Secret
Mexico: Shortsighted
Oil Policies Under
de la Madrid
Mexico is encountering problems meeting its oil
development goals because of financing and
marketing constraints. Efforts to maximize public-
sector revenues from oil sales have caused Pemex,
the national petroleum corporation, to fall short of
critical maintenance, development, and exploration
targets needed to sustain present petroleum produc-
tion levels. Meanwhile, the country faces a continu-
ing decline in world oil prices that would further
erode petroleum revenues. Mexico's poor prospects
for stemming the slide in oil revenues over the next
few years probably will result in postponing needed
investment in oil production for the remainder of de
la Madrid's term in office.
Impact of the Financial Crisis
Since the financial crisis in mid-1982, the govern-
ment's dependence on oil revenues has increased
sharply as foreign lending and investment have
dried up. In turn, Mexico City has pushed Pemex
to decrease the costs of production and distribution
to boost net oil earnings and repay the large foreign
debt accrued by the company during the oil boom
years. As a result, Pemex in 1984 earned profits
equal to more than 55 percent of revenues, com-
pared with deficits of almost half of total earnings
in 1981, the US Embassy reports. Moreover,
Pemex reduced its debt by $4 billion to a little over
$17 billion in 1983-84.
The oil company's focus on profitability, however,
has hampered its exploration program and its abili-
ty to maintain production levels in future years.
Because of the emphasis on current production and
marketing at the expense of aggressive exploration,
we estimate that actual outlays for investment
reached only about two-thirds of budgeted levels in
1983-84. Consequently, Mexico's proved oil re-
serves dropped slightly for the first time last year.
financial reasons.
We believe, moreover, that Mexico City will be
unable to meet its plan to boost oil production
almost 60 percent in 1985-89 by drilling 1,000 new
wells. Although the oilfields are technically capable
of producing at this higher rate, we believe that the
$4.3 billion in outlays Pemex projected for its
drilling program is less than 30 percent of actual
drilling costs. Even the 1985 goal of discovering
about 2 billion barrels of oil-six times more than
last year's finds-appears to be out of reach for
Reduced exploration has been accompanied by
other cutbacks that already are reducing Mexico's
current production capacity. Pemex is lowering
maintenance expenditures-estimated by the US
Embassy to be more than 50 percent below bud-
get-by easing standards, reducing parts inven-
tories, and cannibalizing equipment. Operational
problems have resulted when foreign purchasing
constraints led Pemex to buy inferior domestically
produced equipment. As a result, Pemex no longer
has 300,000 b/d excess production capacity to use
to meet unexpected demand.
Caught in an Oil Glut
The de la Madrid administration's difficulties in
achieving its overall economic goals are compound-
ed by the continuing fall in oil prices. Early this
year the government cut the price of its light crude
oil by $1.25 per barrel to stem a slide in petroleum
export volume. Many oil purchasers had refused to
take large portions of their allotments in January
and February until the government reduced the
Secret
DI IEEW 85-024
14 June 1985
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000807570001-5
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000807570001-5
Mexico: Selected Petroleum Indicators,
1979-84
Average Daily Oil Production Average Daily Crude Oil
Exports
Oil Purchases, 1984
Thousand b/d
United States
Spain
Japan
United Kingdom
France
Israel
Brazil
Other
cost Even with the
February price cut, which reduced projected reve-
nues some $300 million this year, the country still
faces stiff price competition. Pressures from buyers
are forcing Mexico City to consider dropping its
average crude price by at least one dollar. Each
additional dollar-per-barrel cut in light and heavy
crude prices would cost Mexico some $500 million
annually.
Mounting competition from other producers is
making it harder to secure annual sales contracts
with foreign purchasers. Many US companies al-
ready are reluctant to sign long-term contracts,
preferring to commit themselves for shorter periods
to take advantage of price fluctuations. Despite
Mexican rhetoric about reducing reliance on the
US market-which accounts for about 50 percent
of its oil exports-government officials are con-
cerned that competitors will take a greater share of
shrinking US oil purchases, according to the US
Embassy. For example, Mexico City fears that
Canada's aggressive sales and pricing strategies
will reduce Mexico's shipments to the United
States by about 60,000 b/d-about 8 percent of its
current deliveries
Mexico also expects that price cutting by US oil
producers and rising protectionism among refiners
will erode Mexico's previously secure market posi-
tion. Independent refiners are pushing for higher
US tariffs on refined products-particularly gaso-
line-that could cut into the refined product ex-
ports Pemex is counting on to offset losses in crude
sales. Meanwhile, efforts to move away from the
US market by boosting sales to Western Europe,
Japan, and other Asian countries have met with
little success.
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000807570001-5
PEMEX Contribution to Public-
Sector Revenues
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000807570001-5
Limited Policy Options
Mexico City has little room to maneuver to respond
to any drastic change in oil market conditions in
the near term. With production near capacity and
domestic demand rising, Pemex cannot boost out-
put enough to offset a sharp drop in prices. Inade-
quate storage capacity also makes it difficult for
Mexico City to vary exports in response even to
short disruptions caused by bad weather or tanker
scheduling problems. The de la Madrid administra-
tion supports the official OPEC price and will avoid
dropping Mexican prices unilaterally, but we be-
lieve Mexico's need for revenues will lead to price
adjustments necessary to meet export targets.
Nevertheless, Mexico City probably will try initial-
ly to stick to its present conservative policy of
following the market, cutting back on price or
production only after customers reduce their ur-
chases
We believe that Mexico probably will seek
to reac its 1985 crude export goal of 1.5 million
b/d by negotiating flexible sales contracts that
allow for larger sales.
The government will try to maximize earnings by
requiring overseas purchasers to take 40 percent of
their imports in costlier light crude, according to
industry press sources. Given Mexico City's present
difficulties in selling its light oil overseas, however,
Pemex probably will be forced to try to boost sales
of its lower priced heavy crude. In addition, Pemex
officials have announced that they will hike petro-
leum product exports-at competitive prices-to
make up for any shortfalls in crude oil export
earnings.
Prospects for stemming the decline in oil revenues
during the remainder of de la Madrid's term are
worsening. Despite elaborate development plans
and the President's concerns about declining petro-
leum reserves, Mexico City is unlikely to finance a
significant increase in exploration activity. In an
effort to offset declining reserves without incurring
heavy costs, Pemex will continue to restrict explo-
ration to the Bay of Campeche, where major
discoveries already have been made and offshore
drilling is inexpensive by international standards.
Exploration in more risky but potentially promising
areas will be avoided because of higher costs. F
25X1
25X1
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000807570001-5
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000807570001-5
Secret
Bolivia:
Grim Export Prospects
La Paz needs to increase exports to resume servic-
ing its $4.8 billion foreign debt, but domestic
economic chaos and an unstable political climate
preclude such an effort. Since 1980, Bolivia's ex-
port earnings have steadily contracted, and we
project another earnings drop in 1985 because of
the growing overvaluation of the peso and contin-
ued smuggling of export goods to circumvent price
and foreign exchange controls. Despite Bolivia's
rich resource base, we believe wide-scale changes in
government policies are needed to restore export
incentives.
Decline in Exports
Bolivia: Commodity Exports Million US $
Total
1,035
763
Natural gas
221
374
Tin
377
214
118
36
110
73
23
16
Sugar
52
12
Coffee
21
7
A slide in world metal prices, chaotic economic
policies, and political turbulence have caused a
steady contraction in Bolivian exports. Between
1980 and 1984, Central Bank data indicate export
earnings declined by more than 25 percent, while
their share of GDP fell from 26 percent to 18
percent. Almost all commodities suffered setbacks
during the period:
? Mineral exports declined almost 50 percent be-
cause of world recession, labor unrest in the
mines, and the lack of new investment and
exploration.
? Agricultural commodities, particularly sugar,
coffee, and beef, plunged 80 percent as price
controls have encouraged smuggling, and re-
sources were diverted to coca production.
? Timber and other exports suffered from the
overvalued peso, which undermined export
incentives.
The only bright spot was natural gas exports-sold
to Argentina under a long-term contract-which
rose 70 percent and now account for one-half of
foreign sales.
As a result of the export slump, Bolivia's debt
service has become increasingly unmanageable.
Judging from Central Bank data, interest and
principal obligations as a share of exports doubled
to 56 percent between 1980 and 1984. Western
credits are unavailable because La Paz has refused
to negotiate an IMF-supported adjustment pro-
gram. La Paz halted all payments to private foreign
creditors last June. Overdue interest to commercial
banks totaled $127 million by the end of 1984.
Eroding Export Competitiveness
Weak international tin prices are only one facet of
Bolivia's growing lack of competitiveness in world
markets. Since 1980, tin production has fallen from
30,000 metric tons to an estimated 18,000 tons last
year because of a lack of funds necessary to
upgrade equipment and to purchase replacement
parts.
Bolivia is the world's highest cost tin producer. The
US Embassy reports the government currently
Secret
DI IEEW 85-024
14 June 1985
25X1
25X1
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000807570001-5
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000807570001-5
Bolivia's flourishing cocaine trade bolsters the
economy, but at the expense of legal exports
earnings. Although over 90 percent of the estimat-
ed $2.5 billion earned through the drug trade
during 1984 remained in bank accounts outside the
country, the proportion that flows back supports
extensive drug-trafficking networks, including
farmers who produce coca leaves.
we estimate that
$150-200 million in drug money was remitted to
Bolivia last year, making coca Bolivia's third-
largest foreign exchange earner. Because coca pro-
duction is so lucrative, however, it drives farmers
away from cultivation of legal crops.
a farmer in the fertile Santa
Cruz region, for example, could earn 10 times
more money producing coca leaves than banana or
citrus crops destined for export.
loses over US $6 on every pound of tin it sells.
Nevertheless, tin mining still accounts for about 30
percent of Bolivian export earnings.
Bolivia's other mineral exports have also witnessed
a loss of competitiveness, which has caused export
volumes to contract since 1980. New exploration
activity has nearly ceased in the face of foreign
exchange shortages for imported equipment and
onerous corporate taxes. Moreover, mismanage-
ment, heightened by a 1983 decree that gave
workers majority representation on the board of
directors of the state mining corporation, has im-
peded investment in cost-saving technology. Press
reports indicate that frequent work stoppages and
strikes plague the minerals industry, disrupting
exports and hastening Bolivia's displacement by
alternative suppliers. A national strike in March
cost the mining industry $15 million in lost foreign
exchange, according to Embassy reporting
Agricultural and other exports have been harmed
by the government's failure to devalue in line with
inflation, which is currently running at an 8,200-
percent annual rate. Growing price controls have
led to a massive diversion of export trade into
contraband channels, with up to 50 percent of some
commodities-gasoline, flour, sugar-crossing the
border illegally, according to Embassy reporting.
The government must authorize all trade in agri-
cultural commodities and sometimes bans export
sales when domestic supplies are perceived to be
insufficient. In addition, many farmers, attracted
by the returns offered by cocaine, have abandoned
production of legal crops.
Although sales of natural gas have increased, this
trade is vulnerable. Argentina is Bolivia's sole
customer for natural gas, but US Embassy report-
ing suggests that energy-rich Argentina views the
purchases as economic assistance. Although Buenos
Aires is under contract to continue purchases
through 1992, it has indicated it would suspend the
contract in the event of a coup in Bolivia.
Bleak Near-Term Prospects
The current policies of the politically weak, lame-
duck Siles administration are further undermining
export performance. Despite a large devaluation in
May, the US Embassy indicates the black-market
foreign exchange rate is still almost four times the
official rate. Although private exporters are now
allowed to keep 30 to 40 percent of their foreign
exchange earnings, production for export remains
unprofitable because of the overvalued peso and
spiraling production costs.
We believe the current economic disarray will
impede export recovery this year. Work stoppages
and strikes will probably continue to halt export
production periodically. Despite a policy of periodic
devaluations, inflation, likely to move into five
digits because of the inability to restore fiscal
discipline, will worsen the overvaluation of the
currency. Price controls will continue to exert a
chilling effect on export activity by encouraging
smuggling. Moreover, commodity prices will re-
main weak through the end of the year. We believe
Bolivia's exports will drop another 20 percent to
25X1
25X1
25X1
25X1
25X1
25X1
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000807570001-5
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000807570001-5
Secret
Bolivia: Key Export Trends, 1980-84
$600 million in 1985. Foreign exchange earnings
will likely be even lower because the Argentines
have consistently fallen behind in paying for natu-
ral gas shipments, according to US Embassy re-
ports.
With the continued decline in exports, Bolivia will
be unable to resume debt servicing this year. The
country will owe $1.3 billion this year on its $4.8
billion external debt, according to the Planning
Ministry, yielding a debt service ratio of nearly 220
percent. We judge that only a major debt resched-
uling with highly concessional terms would enable
the country to resume payments.
La Paz is proposing a
20-year repayment plan, with an eight-year grace
period on principal and perhaps interest. Without
an IMF-supported program, however, bankers
would be unwilling to grant such debt relief. F_
I I I 1 1
60 1980 81 82 83 84a
Longer-Run Outlook
The successor to Siles, expected to assume office in
August, must find a way to increase exports to 25X1
lessen economic constraints. Rational development
of the rich natural resource base could help turn
around the export performance. World Bank stud-
ies indicate there are sizable natural gas reserves
that could be developed for export to Brazil al-
though negotiations have stalled because of Boliv-
ian domestic criticism and inability to secure fi-
nancing for a pipeline. In addition, oil and lithium
deposits could be developed profitably 25X1
The fertile lowland provinces also 25X1
could yield sizable export crops, according to the 25X1
We judge progress in fully realizing this export
potential will be slow. The next administration wil125X1
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000807570001-5
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000807570001-5
need to revamp policies to diminish economic un-
certainty and provide export incentives:
? Fiscal and monetary discipline will be necessary
to break hyperinflation and resuscitate
production.
? The gap between official and black-market ex-
change rates must be eliminated through large-
scale devaluations.
? Price decontrol will be necessary to discourage
smuggling, and farmers must be wooed away
from coca cultivation.
Beyond these measures, La Paz will need to revital-
ize its private sector and provide incentives to bring
in multinational investment to develop the mineral
and energy sectors
Secret 14
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000807570001-5
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000807570001-5
Secret
Chile: Favorable
Export Outlook
Santiago is focusing on expanding exports to meet
its debt service obligations, and, despite a setback
last year as copper revenues fell, copper will remain
the key earner of foreign exchange. Chile is trying
to find new markets, but Western Europe, Japan,
and the United States probably will continue to
take the major export share. We believe that
aggressive devaluations and enhanced marketing
could bolster total export sales as much as 7
percent in 1985, and, barring new external shocks,
we believe exports could expand at about a 12-
percent average annual rate during 1985-87.None-
theless, to meet its desired 4- to 5-percent economic
growth targets and its growing debt service obliga-
tions, Chile needs about $2 billion in new foreign
borrowing over the next three years
Export Performance in Perspective
Throughout the 1970s, free market reforms-such
as removing subsidies, cutting tariffs, decontrolling
prices, and boosting savings-permitted new
export-oriented investments, which, combined with
exchange rate reform and a policy of flexible
devaluations, enhanced Chilean export competitive-
ness. As a result, exports doubled to $4.8 billion
between 1975 and 1979. Despite this success, the
government abruptly shifted to a fixed exchange
rate in 1979. This had the desired effect of cutting
inflation, but it also resulted in a 22-percent plunge
in exports by 1982. Flexible exchange rates were
reinstituted in 1982, and this helved exports grow
nearly 4 percent in 1983.
Although Chile expanded its export volume in
1984, total export revenues fell. Copper revenue-
the export mainstay-and sales of other mining
products fell as world demand and prices remained
depressed, and this more than offset healthy in-
creases in sales of agricultural, forestry, and marine
products. Although arms sales-estimated at over
$100 million in 1984-still account for a small
Chile: Exports to Main Markets, 1984
China 3.4
Italy 4.3
Kingdom 5.3
France 4.4
United
share of overall exports, the emerging Chilean arms
industry opened a new Middle Eastern market,
selling cluster bombs to Iraq.
Santiago also sought new markets in 1984 to offset
lackluster sales in traditional markets. Japan
showed a 70-percent increase in purchases, largely
for copper, agricultural, and fish products. Brazil
increased purchases by 38 percent, and China
expanded its purchases from Chile's fishing indus-
try. In contrast, Chile suffered export declines in
West Germany, the United Kingdom, France, and
Italy, which purchase nearly 25 percent of the
country's exports. The United States-the largest
Secret
DI IEEW 85-024
14 June 1985
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000807570001-5
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000807570001-5
Chile: Commodity Exports, 1982-87
Total exports
3,706
3,835
3,691
3,948
4,602
5,148
(Percent increase)
3.4
3.5
-3.7
7.0
16.6
11.9
Mining products
2,368
2,558
2,300
2,486
2,890
3,230
(Percent increase)
-4.1
8.0
-10.1
8.1
16.3
11.8
Copper
1,684
1,871
1,700
1,810
2,115
2,416
(Percent increase)
-3.1
11.1
-9.1
6.5
16.9
14.2
Agricultural products
375
328
448
404
484
582
(Percent increase)
2.7
-12.5
36.6
-9.8
19.8
20.2
Marine products
412
445
484
455
478
516
(Percent increase)
25.0
8.0
8.8
-6.0
5.1
8.0
Forestry products
342
324
383
397
445
490
(Percent increase)
-9.3
-5.3
18.2
3.7
12.1
10.1
Other
209
180
76
206
305
330
(Percent increase)
-29.5
-13.9
-57.8
171.0
48.1
8.2
a Based on Central Bank statistics.
b Estimated.
single market-cut imports 12.2 percent, as copper
purchases fell.
The Export Imperative
Santiago is redoubling its efforts to encourage
exports to eliminate its projected $1.1 billion cur-
rent account deficit this year. Santiago announced
on 13 April that exporters will be able to reduce
value-added tax liabilities for domestic sales by an
amount equal to 20 percent of their exports. More-
over, press reports indicate that the government
wants domestic arms producers to expand trade
with Iraq and other Third World countries. Santia-
go is encouraging domestic producers to increase
the value of copper exports by switching to the
fabrication of wire and tubing
The government is also considering providing en-
hanced marketing services to exporters, by increas-
ing representation at overseas trade fairs and seek-
ing new markets for all of its exports:
? Santiago wants to increase its copper sales in
Europe and the Far East to become less depen-
dent on the US market.
? The government is pushing exports of fish to
Japan, Far Eastern LDCs, Spain, and South
Africa.
? Chile intends to expand the marketing of forestry
products in South America and China.
Should copper prices recover to an average $0.67
per pound this year, as predicted by Chase Econo-
metrics, we estimate that Chile's aggressive devalu-
ations and export promotion plans will probably
result in about 7-percent overall export growth in
1985. We believe CODELCO-the state mining
company-will again boost copper production be-
tween 2 and 4 percent this year, causing export
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000807570001-5
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000807570001-5
Secret
revenues to rise about 6.5 percent. Much of the
additional volume probably will go to Japan, South
Korea, and China. We also believe forestry exports
are likely to increase by about 3.7 percent, but
falling world prices will probably reduce agricultur-
al export value 10 percent. We judge arms sales
will be brisk-over $100 million-as Chilean pro-
ducers fill new orders in the Middle East. Addition-
ally, arms sales could expand in Central America
and West European countries
Longer Run Expansion Plans
Over the next few years, we believe Santiago will
continue to pursue policies designed to capitalize on
its established export base and to benefit from a
recovery in world commodity prices. The govern-
ment will probably concentrate on providing con-
cessionary credit through the state development
corporation for established export products while
encouraging increased processing of commodities
and higher quality standards to develop new mar-
kets. We believe Chile will continue to devalue the
peso to improve the competitiveness of its products.
According to press reporting, the government may
also implement a differentiated tariff structure to
favor imports of goods used in export production.
The shortage of investment funds, however, is likely
to impede research and development of new manu-
factures exports.
Export earnings could expand by as much as 40
percent over the next three years if copper sales
remain strong.
Chile will continue to reinvest earnings to
expaan copper production-the rate of return on
investment even at the present low prices is averag-
ing 24 percent. On the basis of Chase Econometrics
world market forecasts,' we project that Chile's
copper earnings will rise by as much as 40 percent
to $2.4 billion by 1987. New production will proba-
bly be directed largely at Chile's main trading
partners, but Santiago will have some success in
developing markets in South Korea and China.
We believe agriculture and forestry products will
experience the strongest growth. Forecasts of in-
creasing prices and Santiago's aggressive market-
ing strategy-especially in Asia-should enable
agricultural exports to rebound in 1986 and contin-
ue this growth in 1987. Meanwhile, forestry exports
probably will grow to $490 million in 1987. We
believe paper and pulp sales probably will expand
in South American countries, and all types of
forestry products probably will be sold to China.
Marine products will grow modestly from their
1984 level because of overfishing, but Chile's in-
creasing marketing efforts in Third World coun-
tries-including those embargoed by the United
States-should enable arms sales to reach well over
5200 million
Continued Financing Needs
Santiago hopes that expanding exports will cover
its debt service obligations and support a 4- to 5-
percent domestic growth rate over the next several
years. Judging from Chilean Government, US Em-
bassy, and our own projections of exports and
available foreign financing, Chile will still need
additional new commercial lending. Santiago
would require nearly $1.9 billion in new commer-
cial credits over three years-$1 billion in 1985,
$600 million in 1986, and $260 million in 1987. We
believe Santiago will continue seeking new financ-
ing from official and private sources, particularly in
the United States. 25X1
financial press reports indicate, however, that com-
mercial banks will cover at most $1.3 billion of the 25X1
shortfall. The prospective $600 million foreign fi-
nancing gap will probably force the government to 25X1
toughen austerity measures, reduce imports, and
draw down reserves. We believe such measures will
contribute to social restiveness in Chile at a time of
growing national debate over the transition to
25X1
25X1
civilian government.
' Chase estimates copper prices will rise from an average of $0.63
per pound in 1984 to $0.84 per pound in 1987, while Chilean copper
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000807570001-5
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000807570001-5
Secret
Sudan: The Limited Role
of the Private Sector
Sudan's more immediate problems-including
IMF arrearages and the government's reluctance to
adhere to a previously agreed upon package of
reforms and austerity measures-tend to obscure
more fundamental economic problems. Efforts by
the struggling military/civilian government in
Khartoum to simultaneously stimulate a comatose
economy, cope with a staggering debt repayment
schedule, and deal with famine and insurgency
dramatize the seriousness of Sudan's plight. As a
first step, we believe Sudan needs to abandon a
longstanding preference for statist economic solu-
tions and move toward more decentralized private-
sector participation in the economy.
Sudan's economic development over the past 10
years includes a string of unsuccessful IMF-
sponsored economic stabilization programs. In each
case, Khartoum agreed to undertake major reforms
to increase resource mobilization by the central
government and correct distortions in the economy.
Almost invariably these programs have bogged
down, partly because of factors beyond the regime's
control, but mostly as a result of inconsistent or
heavyhanded government policy implementation
A preference for government control over all facets
of economic activity appears deeply ingrained in
the political and cultural experience of the Suda-
nese. Arab socialism promulgates the concept of
the state's responsibility to provide goods and ser-
vices to the public. This attitude is reinforced by
the Islamic construct of umma, which obligates the
ruler to provide for the welfare of the community.
Within this context, private economic initiatives
are often seen as representing exploitive threats to
the peoples' well-being.
Obstacles to Expanded Private-Sector Role
Despite Sudanese lipservice to greater private-
sector participation, obstacles to private enterprise
have grown over the past several years. In particu-
lar, the Islamization of the legal system has threat-
ened elimination of the limited-liability business
organization and also has introduced a vast number
of minor, and often confusing, changes in business
law. Moreover, foreign exchange rules adopted in
February banned private-sector participation in the
foreign exchange market and disrupted the flows of
remittance earnings and private-sector import
financing.
25X1
25X1
Perhaps the greatest threat to the private sector has
come from the creation of the Military Economic
Board (MEB). In the past two years, this parastatal
has moved into direct competition with private
enterprises. Its preferential access to government
funds and leaders allowed it to absorb many public-
sector firms, form joint ventures with foreign firms,
and organize several new subsidiaries. Donor pres-
sure in the past year has reduced the MEB's
preferential access to funds, and the new military
leaders have suspended most of its operations pend-
ing corruption and waste investigations. The con- 25X1
tinued existence of the MEB will, however, remain 25X1
a major obstacle to private-sector development.
Agriculture: The Need for Divestiture
The sluggish performance in the irrigated agricul-
tural sector-which produces almost all of Sudan's
cotton, wheat, and sugar-is attributable to over-
centralization and lack of private initiative. Culti-
vation is concentrated within five huge state-owned
Secret
DI IEEW 85-024
14 June 1985
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000807570001-5
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000807570001-5
"schemes." Management boards appointed by the
central government dictate what is planted by the
tenant farmer and also control access to agricultur-
al inputs and capital. This management system has
proved unwieldy and inefficient and has led to
costly mistakes in resource allocation
The management-board-tenant relationship has
also provided little incentive for farmers to main-
tain an active interest in field and equipment
maintenance. Tenants tend to view problems such
as breaks in canals and ruptures in pipes as the
responsibility of management. As a result, in recent
years there has been a marked physical deteriora-
tion within the major irrigation networks.
The Sudanese response to problems in the irrigated
sector concentrates on state-sponsored infrastruc-
tural rehabilitation and removal of financial disin-
centives for tenant farmers. In conjunction with
international donors, principally the IBRD, irriga-
tion canals are being dredged and access roads
improved. Export taxes on crops such as cotton
have been abolished, and management is providing
tenants with added financial inducements. These
measures may raise output, but they do not repre-
sent a long-term solution to the problem. Canals
and access roads, once rehabilitated, will soon fall
into disrepair again unless farmers are given reason
to take a much more personal interest in the land.
The need for private ownership has, however, been
virtually ignored by Khartoum and international
donors alike. Sudan's leadership probably bases its
opposition on deep-seated skepticism that farmers
could manage irrigated systems without govern-
ment supervision. Donor reluctance to push private
ownership relates to Sudan's already serious eco-
nomic plight and the fear that further administra-
tive turmoil in the agricultural sector could lead to
an even worse situation.
Prospects for Change
There appears to be little prospect that the change
in government will produce a shift in Sudanese
attitudes toward privatization. Both military and
civilian members of the provisional government are
more concerned with correcting abuses within
public-sector enterprises than in launching any bold
economic initiatives. Moreover, outspoken criticism
by high-level Sudanese officials of IMF policies
probably ensures a hostile reception for the private-
sector expansion, which the Fund emphasized as
integral to reform. Most recently, the private bank-
ers committee charged with setting the new ex-
change rate was denied permission by government
authorities to adjust the rate-a clear violation of
the understanding that had been reached with the
IMF before Nimeiri's fall and a major blow to
currency reform efforts.
Although donors have made repeated attempts to
rekindle Sudanese interest in private-sector initia-
tives, a large gap remains between rhetoric and
substance. Under the old regime the government
restructured many public enterprises and registered
them under standard business laws. Although these
firms are listed as private, full ownership and
control remains in government departments. Do-
nors probably will not accept such cosmetic
changes as representing progress toward private-
sector participation in the economy.
A reorientation of funding by major donors is
probably also necessary. Currently the major share
of funds is allocated to the public sector, which is
where the large unfinished or poorly maintained
projects are found. Donors, for example, could tie
loans for the irrigated agricultural sector to trans-
fers of land to existing tenants.
Ultimately, no amount of donor pressure will suf-
fice unless the Sudanese themselves are convinced
of the necessity to decentralize and expand the
private sector. Such acceptance would require a
long-term modification of existing political and
cultural values making the near-term outlook for
private-sector development in Sudan bleak.
25X1
25X1
25X1
25X1
25X1
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000807570001-5
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000807570001-5
Secret
Energy
Itgltan-Libyan
price of Soviet natural gas imported under its 1982 contract
Gaz de France, the French state gas firm, has negotiated a reduction in the
In the face of falling oil prices, the Soviet Union has lowered
atural Gas Dispute
of
25X1
25X1
sing Iranian Tehran has established new import guidelines that allow the National Iranian 25X1
Policy on US Oil'---r Oil Company (NIOC) to buy some US petroleum equipment,
Equipment Purchases
at competitive prices.
the price 7 percent to a level believed equivalent to the Soviet-Italian gas price
of $3.40 per million Btu. Because of French concerns about a possible
oversupply of gas in 1986, the Soviets have also agreed to a postponement in
maximum deliveries from 1986 to 1990, as well as a 20-percent downward
flexibility in the original peak contract volume of 8 billion cubic meters (bcm)
to 6.4 bcm annually. France currently imports nearly 80 percent of its natural
gas requirements, receiving about 17 percent of its demand from the Soviet
Union. In the 1990s, however, France could be dependent on Soviet gas for as
much as 35 to 40 percent of French demand, unless new sources are developed
imports of LNG from Algeria
The Italian-Libyan mixed commission will meet on 2 July to resolve the
dispute over Italian purchases of Libyan liquefied natural gas (LNG). The
Italian contract for 750 million cubic meters of LNG expired at the end of
April, and Italy chose not to take any LNG during the summer. In response,
Tripoli stopped oil shipments to Italy under its debt-repayment program.
Libya wants a long-term contract with Italy as a matter of principle, because
its neighbor Algeria has such a contract. Libya's LNG capacity is estimated to
be less than 2 billion cubic meters annually and suffers from deteriorating
facilities, Tripoli is expected to demand both
higher prices and higher quantities in a future long-term contract, but Rome is
likely to resist because of the current gas surplus resulting from its rising
The guidelines stipulate that only spare parts, and not whole
25X1
units of machinery, can be purchased from the United States.
25X1
however, since the new policy took effect in March 1985, NIOC has
placed orders for whole units of US oilfield and refining equipment by
25X1
describing them as a "spare part." Much of the US-manufactured petroleum
equipment in Iran is not operational or has deteriorated considerably over the
past six years, and recent efforts to increase oil production could lead to 25X1
substantial purchases
Secret
DI IEEW 85-024
14 June 1985
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000807570001-5
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000807570001-5
wait Pushes
Refined Products
,Egyptian Financial Egypt faces a growing external deficit. The Embassy believes that the deficit
Outlook Worsens for the fiscal year ending this month is likely to exceed its earlier projection of
subcontinent.
Kuwait Petroleum Company (KPC), the state-owned oil company, has grown
increasingly aggressive in selling its petroleum products. KPC-which refines
more than half of its crude into products-fears that the addition of 500,000
b/d of Saudi refining capacity by the end of the year will further weaken an
already soft market. To attract customers, KPC is pricing its products as much
as $1 per barrel below market levels. KPC is moving to expand its exports to
Asia-which already purchases more than one-third of Kuwait's product
exports-and has recently bid successfully on several deals on the Indian
request is denied, as is likely.
Ecuador brought new fields into production and started injecting water into its
largest producing field. Production hit a record 282,000 b/d in May-about
100,000 b/d above Ecuador's OPEC quota. Quito steadfastly defends its
policy of expanding output against sharp criticism from OPEC members-
particularly Venezuela and Saudi Arabia. It plans to request an increase in its
quota to 280,000 b/d from 183,000 b/d at the next OPEC meeting, scheduled
for 30 June. Ecuador intends to continue expanding production even if its
$375 million in contrast to last year's $162 million surplus. An IMF team that
recently returned from Egypt reports that the financial gap for the 1985 fiscal
year can only be closed with substantially increased aid or debt rescheduling.
Egypt's principal foreign exchange earners-oil sales, workers' remittances,
and Suez Canal earnings-are stagnating or falling. Moreover, the Fund
believes that recent actions to relax foreign exchange controls and increase
bread and energy prices have done little to stem the flow of red ink. Egypt has
approached the Fund for a standby credit, but reaching an agreement will
prove difficult and time consuming. An IMF-supported adjustment program
probably will focus on raising prices and interest rates, cutting the govern-
ment's budget, and further reforming the foreign exchange system. The
government, however, would not accept any program that comes down too
hard on the populace or gives the appearance of "caving in" to the IMF.
Cuba Reaches Paris Havana and its official creditors have agreed on performance targets, paving
Club Agreement the way for the rescheduling of 1985 debt principal. Although the terms are
generous-particularly considering that Havana failed to meet six of nine
Ecuador Boosts Oil Quito completed the installation of additional pumps along the Trans-
Production Capacity Ecuadorean Pipeline in late May, boosting the country's oil production
capacity to about 300,000 b/d, according to the US Embassy. Despite the soft
oil market, capacity has climbed more than 50,000 b/d over the past year as
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000807570001-5
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000807570001-5
Secret
targets last year-we anticipate that Cuba will have difficulty meeting several
of the new targets. For example, we believe Havana will fall far short on
increasing nonsugar hard currency exports by 44 percent this year. The short-
term outlook for hard currency nickel and citrus earnings is bleak. Stagnating
Soviet oil deliveries and Cuba's growing domestic energy needs also limit
potential earnings from fuel reexports. Moreover, bureaucratic tangles prevent
the development and marketing of nontraditional exports. We believe that
goals for sugar exports to the West are also overly optimistic because of
production problems and Havana's vow to fulfill its sugar quota to CEMA
countries. Disappointing hard currency export earnings plus an anticipated 11-
percent increase in Western imports probably will push the hard currency
current account deficit this year far above the $48 million approved by Paris
Club creditors. As a result, the agreement may be reexamined, either later this
summer, when repayment terms are negotiated, or during a formal review
proposed for October
zechoslovaks Enter Czechoslovakia has entered the international loan market for the first time in
Loan Market two years and probably will obtain a $100 milion syndicated credit at rates
much better than those recently received by the USSR and East Germany.
'
F
The excellent terms result from competition among banks and Prague
s
excellent hard currency payments picture-rather than its general economic
performance that has not been good. This signals a break in the policy of not
borrowing in the West in order to eliminate foreign debt and thereby prevent
any economic leverage. The credit terms probably made it easier for Czecho-
slovak financial officials to convince senior policymakers that the policy should
be eased. Czechoslovakia will also find it easier in the future to borrow at com-
petitive rates by reestablishing a presence in the international credit market.
Global and Regional Developments
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000807570001-5
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000807570001-5
I Afftican Cloud-Seeding
F~`orts
more efficient use of available funds)
Several African countries are preparing to start cloud-seeding projects to help
alleviate the drought Nigeria may soon
approve a US $10 million contract with a Bahamian-registered firm. Libya,
which has run a Western-assisted program since 1981, recently met with
several other African nations, including Morocco, to establish joint projects.
Tripoli is reportedly eager to use such programs for political good will-
especially with Sudan. The head of Libya's Department of Meteorology will
chair an OAU feasibility study of a multinational project and has met
privately with a US firm to seek assistance. Given the high costs of such
programs, the major benefits are more likely to be political than agricultural.
It is doubtful that any additional rainfall from seeding would justify the
expense of personnel and equipment. Effective soil and water conservation
programs, designed to make better use of natural precipitation, would be a
National Developments
Developed Countries
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000807570001-5
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000807570001-5
Secret
Vest German Inflation Despite rising import prices-up nearly 7 percent over first quarter 1984,
Bright Spot for Kohl mainly because of the strong dollar-inflation held at just 2.3 percent in first
a quarter 1985 and continued low in April A disciplined monetary policy fiscal
restraint, and modest wage increases in the face of high unemployment
counteracted the import price pressure. With the easing of the dollar in April
and relative stability since, inflation promises to be at least one important
economic issue Chancellor Kohl does not have to worry about for the
remainder of the year. Polls show that the West German public's traditional
fear of inflation has diminished markedly since his government took office.
following a general calm during the first seven months of the national unity
government. Protests arising from declining economic conditions are under
way by teachers, doctors, taxi drivers, and court employees, and by textile
workers at one financially strapped plant. A large demonstration on behalf of
the textile workers was slated for this week, and work actions are expected
soon by other public employees. The government's band-aid approach to
curing the nation's economic ills has unevenly distributed the burden of
austerity, and pressures remain for more broadly based economic measures.
The government's preoccupation with security issues, however, reduces the
likelihood that it would risk alienating labor as a bloc by continuing to turn the
economic screws too hard in the near term.
Less Developed Countries
/Argentina's Economic V The lack of coherence that plagues Argentina's economic policy is evident in
\ Team the views of two of President Alfonsin's principal economic advisers. Economy
Minister Sourrouille would like to implement a five-year development plan
that stresses private investment and agricultural and energy exports. Citing
inflation as Argentina's most pressing short-term problem, Sourrouille's plan
luggish Spanish
Growth To Prompt
More Unemployment
Preliminary first-quarter GDP growth of only 1.5 percent, at an annual rate,
indicates Spanish unemployment-already 22 percent-almost certainly will
rise again in 1985. As a result, the Bank of Spain has lowered its forecast for
1985 GDP growth to less than 2 percent-the government originally expected
3 percent. Central Bank economists have become more pessimistic because
real wage losses and high unemployment have kept private consumption flat
and because investment has turned up only marginally. Spanish officials now
project that up to 150,000 jobs will be lost this year, which we estimate would
raise the unemployment rate 1 percentage point. On the bright side, infla-
tion-on a December/ December basis-is expected to fall from 9 percent to
7.5 to 8 percent. Despite the likelihood of rising unemployment and mounting
criticism from labor unions, we expect that the Socialists will continue their ef-
forts to liberalize the economy and restructure industry.
sraeli Labor Unrest The US Embassy reports an increase in labor strikes and in work actions
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000807570001-5
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000807570001-5
supports cutting the budget deficit by reducing public spending and divesting
some public corporations. Central Bank President Concepcion, on the other
hand, who favors expanded state intervention in the economy, is representative
of old-line politicians in the ruling Radical party. He supports rapid devalua-
tions to make Argentine goods more competitive and favors new restrictions on
banking transactions. We doubt that Sourrouille's call for a reduction of the
public sector will find much favor in the Alfonsin administration, which is
icaraguan
4udan-Libya Aid
Pact Defined
hesitant to rely on free market principles.
About 500 workers at two factories in the important industrial city of Granada
staged wildcat strikes last week to protest the government's decision to prohibit
workers from being paid in merchandise. Authorities cited the need for more
sacrifices as a result of the US sanctions. A clash with police resulted in 20
arrests and 10 injuries. The stoppages are the first since the regime effectively
prohibited the right to strike late last summer. The new restrictions will
further erode incomes because salaries in kind had permitted workers to
double their wages by selling the merchandise on the black market. Consumer
price inflation is currently running more than 100 percent annually, and wages
have not kept pace. The regime will continue to deal firmly with strikes, but
sporadic resistance is likely.
Libya will supply 300,000 metric tons of crude oil to Sudan over the next six
months under the terms of a recently signed petroleum accord. Deliveries of
50,000 tons per month--55 percent of domestic demand--are scheduled to
begin by late June. Sudan must provide transportation and pay shipping costs.
In addition, six planes are en route to Sudan for use by the joint agricultural
company established in May. Food and humanitarian assistance continue to
arrive in Khartoum by plane, but the 1,000-truck convoy from Libya has not
materialized. Khartoum's new military leaders will be hard pressed to monitor
the growing number of Libyans entering Sudan who probably will be used to
influence the new regime or foment unrest should relations sour
f12"oroccan Devaluation The Moroccan dirham continues its slide, averaging-since January-11
Proceeding percent against the US dollar, the French franc, and the deutche mark. The
Algerian Farmers
Riot
government has yet to publicly acknowledge the IMF-suggested devaluation,
which probably will reach the targeted 12 percent by the end of June. The op-
position press, however, has highlighted the exchange rate movements and
blamed them on pressure from international financial institutions. Neverthe-
less, the devaluation demonstrates Morocco's intention to abide by IMF
financial guidelines-a key element in Rabat's forthcoming debt rescheduling
negotiations with international creditors.
Violence erupted recently in several communites in southern Algeria as
farmers clashed with local authorities over land-allocation policies. Several
25X1
25X1
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000807570001-5
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000807570001-5
Secret
dozen people were injured as tempers flared over foot-dragging by government
officials and perceived favoritism in land grants. Since Algeria's land-
distribution program began in 1983, 7,800 hectares of public land have been
allocated in 3-hectare plots. An additional 12,000 hectares will be distributed
this year, with a long-term goal of 70,000 hectares. Despite the recent protests,
there is broad domestic interest in agrarian reform. The regime will have to
move cautiously to avoid further unrest and criticism by remaining socialist
hardliners opposed to President Bendjedid's reforms.
Zambian Miners Fired Over 4,000 Zambian copper miners were fired after a wildcat strike over pay
Indian Economic
Liberalization
Continues
and benefits last week, according to US Embassy reporting. Tensions have
flared over declining real wages as Lusaka has sought to boost food prices to
encourage agricultural exports. As a result, union leaders are caught between
rank and file demands and government efforts to diversify exports away from
copper and cobalt, which account for over 90 percent of foreign exchange
earnings. Lusaka is under IMF pressure for a 25X1
sharp devaluation and may agree to devalue during negotiations in mid-June.
Although Lusaka successfully ended the latest strike, the devaluation would 25X1
almost certainly add to Zambia's 20-percent inflation rate and trigger new
walkouts. To avoid disruptions to the vital mining industry, the government
may try again to bring the strong and independent unions under ruling party
control 25X1
New Delhi has further eased government controls on private industry despite
signs of mounting opposition to Rajiv Gandhi's liberalized economic policies.
Large corporations no longer need special exemption from antimonoploy
legislation before they establish or expand capacity in 27 industries, including
electrical components, oil industry services, and fertilizers. Although the
corporations must obtain an industrial production license, government approv-
als should be expedited by elimination of the formal opportunity for other
manufacturers to object to their competitors' investment plans. The Cabinet
has also approved a controversial proposal to permit domestic manufacturers
to use the brand names of their foreign associates. In addition, New Delhi has
reduced the share of cement output that manufacturers must sell to the
government at controlled prices.
Software development is expected to play a major role in Prime Minister
Gandhi's campaign to expand India's technological capabilities. The develop-
ment of software for export is receiving particular emphasis. With an
abundance of trained, English-speaking software engineers and low labor
costs, India has the potential to become a major player. Approximately 50
Indian firms are involved in software adaptation and development both for
domestic use and for export. India has had a program to develop software for
export since 1970, but production has been hindered by acute shortages of 25X1
computer hardware. Nonetheless, software exports have more than tripled
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000807570001-5
 since the late 1970s, to about $20 million a year. New Delhi plans to boost this
level to $300 million a year by 1990. Increased domestic computer production
and the expected influx of advanced Western-origin systems in the coming
years are expected to provide the equipment necessary for this expansion. By
easing onerous production restrictions, New Delhi hopes to increase computer
production by 20 times the current level of approximately 5,000 units by the
1990s. Indian sofware capabilities have attracted considerable foreign interest.
Several major US computer companies are already purchasing Indian software
services and more are interested. In addition, Norway has set up a software
joint venture. Indian software promotion will almost certainly generate even
greater interest in the Soviet Union, where software capabilities are weak. For
some time the Soviets have used Indians to develop and convert Western-origin
software for their computers, many of which are copies of Western machines.
/Singapore Investment / The government-struggling to revive an economic growth rate that slumped
Ventures (/ to a decade low of 3 percent (at an annual rate) during the first quarter of this
Burma's Rice
Procurement
Dfficulties
V
Favorable Soviet
Grain Outlook
year-has set up 11 companies to invest in as-yet-unspecified high-risk, high-
technology ventures in the United States and elsewhere, according to press
reports. The new firms, with capital assets of up to US $64 million each, will
be managed by the Government Investment Corporation. The firms are
intended to provide Singaporeans firsthand experience with new technological
developments and to help the government map out its strategy for redirecting
the economy. Although the scheme will provide no immediate dividends, we
believe it will firm up Prime Minister Lee's image as an economic activist at a
time when traditional export industries are showing no growth
Rangoon's rice procurement during the fiscal year that ended in March fell 17
percent below target because farmers preferred to sell on the black market at
substantially higher prices. Local officials are reluctant to press farmers to sell
their rice to the government, however, fearing that they will lose votes in this
fall's elections. Current export stocks are insufficient to fill outstanding
commitments, and the shortfall probably will curtail exports this year. The US
Embassy projects that exports will be no more than one-half of the 800,000
metric tons shipped in 1984. Moreover, domestic rice distribution problems
will probably be aggravated, and government stores in outlying areas are
already reporting shortages.
Grain crop conditions in the USSR as of early June are mostly favorable.
Serious crop damage from hot, dry weather during May was confined to parts
of the Volga Valley, North Caucasus, Urals, and Kazakhstan-areas that
produce less than 10 percent of the total harvest. In addition, the spring sowing
is nearing completion on time despite earlier delays of two to three weeks,
25X1
25X1
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000807570001-5
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000807570001-5
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000807570001-5
Secret
the downward 25X1
trend in total grain acreage-begun in the late 1970s-is continuing. With
normal weather through July, the winter grain crop-roughly one-third of the
total harvest-is likely to be about 65 million metric tons, second only to the
record 86 million tons in 1978. The spring crop will be determined principally
by growing conditions during the next three months. Even with ideal weather
for the rest of the crop season, Moscow's target of 245 million tons is already
well beyond reach, largely because the area sown to grain is expected to be one
of the smallest since 1970F---] 25X1
Tacit Soviet Approval The party secretary for economics, Ferenc Havasi, told the US Ambassador in
of Hungarian Reforms Budapest that the Soviets tacitly approved Hungarian economic reforms at the
mid-May meeting of CEMA in Moscow. Havasi said the Soviets are willing to
accept separate paths of economic growth by individual CEMA countries; they
will tolerate, for example, some reduction in the extent of administered prices.
He also believes that Soviet General Secretary Gorbachev will eventually
implement his own long-range reform plans but must move cautiously. A
source of the US Embassy in Moscow said that the USSR did not criticize
East European economic policies at the meeting, "not even those of the
Hungarians." This lack of criticism has apparently given the Hungarians
confidence that they have at least a tenuous go-ahead-although not a ringing
endorsement-for their reform program
xpanding Chinese-
Hungarian Trade
relations
Budapest and Beijing are planning a rapid expansion in economic cooperation
and trade. Bilateral trade this year will increase by at least 50 percent to an
alltime high of $250 million, Chinese Vice Premier Li Peng-the most senior
Chinese official to visit Hungary in recent years-signed the 1986-90 trade
agreement in Budapest earlier this month calling for a doubling of trade over
the previous five-year period. Li's visit was followed by the first meeting of the
Sino-Hungarian commission for economic, scientific, and technical coopera-
tion, which, among other things, will facilitate the exchange of experiences in
the economic reform field. Hungary also promised to participate in unspecified
Chinese development programs, and joint efforts will be expanded in agricul-
ture, health, and education. Despite the upsurge in economic ties, we believe
the Hungarians will await a Soviet lead before improving party-to-party
ew Chinese Technol- China last week released regulations covering imports of technical informa-
ogy Import Regulations tion-including patents, prescriptions, product designs, blueprints, and produc-
tion processes. The new rules establish approval procedures, restrict internal
transfers of foreign proprietary information, and bar foreign suppliers of
technology from interfering with China's right to set production and export
levels and prices. The new rules are another step toward the creation of a sta-
ble and regulated business environment in China. Foreign businesses will
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000807570001-5
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000807570001-5
estern China Railway
Nearing Sovyet Border
points.
probably view them as unduly restrictive, however, because of the difficulty in
limiting China's export of goods produced under license. Businesses depending
on royalties will also be displeased with clauses restricting their influence in
determining the quantities and prices of goods. The language of the regula-
tions, nonetheless, is sufficiently broad to allow for negotiation on all of these
northwest.
China plans to add some 400 kilometers to the single-track, Lanzhou-Urumqi
railway, extending the line to within 50 to 80 km of the Soviet border by 1988.
According to the Xinjiang Vice Governor, more than $230 million will be
invested eventually to link the standard-gauge Urumqi line to the Soviet
broad-gauge rail system. The Chinese probably want to open the rail crossing
quickly to facilitate expanding Sino-Soviet border trade. According to press
reports, border trade through Xinjiang Province amounted to about $55
million in 1983-84 and could reach $69 million this year. Moreover, a crossing
in western China would provide access to Soviet railways other than the
heavily traveled Trans-Siberian railway. In addition, the new line will provide
the Chinese improved access to their oil and mineral resources in the
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000807570001-5
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000807570001-5
Iq
Next 1 Page(s) In Document Denied
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000807570001-5
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000807570001-5
Secret
Secret
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000807570001-5