SUPPORT FOR PARIS CLUB MEETING ON POLAND

Document Type:

CREST [1]

Collection:

General CIA Records [2]

Document Number (FOIA) /ESDN (CREST):

CIA-RDP86T01017R000303300001-1

Release Decision:

RIPPUB

Original Classification:

C

Document Page Count:

17

Document Creation Date:

December 22, 2016

Document Release Date:

February 23, 2011

Sequence Number:

1

Case Number:

Publication Date:

January 17, 1986

Content Type:

MEMO

File:

Attachment	Size
CIA-RDP86T01017R000303300001-1.pdf [3]	686.32 KB

Body:

Sanitized Copy Approved for Release 2011/02/23: CIA-RDP86T01017R000303300001-1 t-SouecC 6 +1'e- 25X1 DA= 6Q'/0A1G(' = Na FORA 86 -a000 oct P Central Intelligence Agcncs MEMORANDUM FOR: Mark Linton Office of Monetary Affairs US Department of State Office of European Analysis e , Hegional East-West Economic Branch East European Division SUBJECT : Support for Paris Club Meeting on Poland 1. Attached is our response to your request for support in preparation for the Paris Club meeting on Poland. Attachment 1 consists of a series of six tables that summarize three possible outcomes for Polish debt, along with analysis of how sensitive each outcome is to changes in interest rates (LIBOR) and export earnings. Note that the data in these tables reflect substantial refinements beyond the material you received on 8 January. In particular, I want to call your attention to the optimistic scenario using Polish estimates. The Poles, as pointed out in this attachment, have been inconsistent in reporting their export plans. The following is a list of the tables included in Attachment 1: Table 1: Payments Due to Creditors: Baseline Scenario (CIA estimates). Table 2: Sensitivity Analysis using Baseline Scenario: The effect of changes in LIBOR and export earnings on total debt and financing gaps (CIA estimates). Table 3: Payments Due to Creditors: Baseline Scenario with Annual Reschedulings (CIA Estimates). 17 January 1986 Sanitized Copy Approved for Release 2011/02/23: CIA-RDP86T01017R000303300001-1 Sanitized Copy Approved for Release 2011/02/23: CIA-RDP86T01017R000303300001-1 Table 4: Sensitivity Analysis using Baseline Scenario with Annual Reschedulings: The effect of changes in LIBOR and export earnings on total debt and the amounts of debt relief needed to close the financing gap (CIA Estimates). Table 5: Payments Due to Creditors: Optimistic Scenario (Polish estimates). Table 6: Sensitivity Analysis using Optimistic Scenario: The effect of changes in LIBOR and export earnin s on total debt and financing gaps (Polish estimates). 25X1 2. We also have included in Attachment 2 a figure showing the level of debt generated by the baseline scenario (Table 1), and an article assessing Polish export potential. The figure illustrates how an extremely small change in LIBOR and export performance eventually has a substantial impact on the 25X1 level of gross debt. The article analyzes the potential for Polish had currency exports to grow both from a demand and a supply perspective. 3. I hope this information will prove useful to your needs. If you have any questions concerning this work, Attachments: As Stated Sanitized Copy Approved for Release 2011/02/23: CIA-RDP86T01017R000303300001-1 Sanitized Copy Approved for Release 2011/02/23: CIA-RDP86T01017R000303300001-1 Comments Concerning the Scenarios and Polish Export Projections 1. We use the term Total Due to Unspecified Creditors to show obligations arising from new credits and future financing gaps that will either go into arrears or be rescheduled. We do not allocate these amounts to specific creditor groups (banks, governments, or other) because this will depend on Warsaw's decision about which groups to pay and on which groups will provide new credits and debt relief. The amounts shown as being due to specific creditor groups are those owed under the on inal loan contracts or already concluded rescheduling agreements. 25X1 2. All tables incorporate the rescheduling of the 1982-84 arrears and the 1985 Paris Club rescheduling. 25X1 3. We have made the following estimates concerning new credits for the baseline scenerio: 1986: $200 million - government, banks, and other creditors. $ 90 million - first tranche of IMP' credit. 1987: $200 million - government, banks, and other creditors. $350 million - IMF. $100 million - IMF, compensatory financing facility. 1988-90: $200 million annually - goverment, banks, and other creditors. $350 million annually - IMF. $400 million annually - World Bank (based on Yugoslavia's experience). 4. The Poles have announced several conflicting projections of 1986 hard currency export plans in the last two months--one for public consumption, the other for the benefit of the creditors: --a report on the 1986 plan in the 6 December issue of the newspaper Polityka announced exports to the West would increase by only 3.8 percent. --Manfred Gorywoda, chairman of the Planning Commission, said at a 20 December Central Committee Plenum that hard currency exports would increase by 5 percent. --the Polish hard currency export target presented to the creditors in December 1985 was 9.2 percent. Sanitized Copy Approved for Release 2011/02/23: CIA-RDP86T01017R000303300001-1 Sanitized Copy Approved for Release 2011/02/23: CIA-RDP86T01017R000303300001-1 --the 1986-90 plan projects a 7 percent annual growth of exports to the West. The Poles do not specify why the projected increases differ, but it could rati,lt from the use of different 1985 bases, either customs or payments data. Sanitized Copy Approved for Release 2011/02/23: CIA-RDP86T01017R000303300001-1 Sanitized Copy Approved for Release 2011/02/23: CIA-RDP86T01017R000303300001-1 TABLE 1 POLAND: PAYMENTS DUE TO CREDITORS IN MILLION US DOLLARS AS OF 1/13/86 SCENARIO: BASELINE (CIA ESTIMATES) Years Terms 1985 1986 1987 1988 1989 1990 -------------------------------------------------------------- TOTAL PAYMENTS DUE TO CREDITORS 3093 6856 10765 16169 21177 25570 --------------------------------------------------------------- TOTAL PRINCIPAL DUE 549 2659 2928 4450 3942 2757 TOTAL INTEREST DUE 2545 2694 2871 3244 3698 4311 TOTAL ARREARS 0 1503 4966 8475 13537 18502 TOTAL DUE TO GOVERNMENTS 1032 3228 2519 2543 2628 3139 Principal 0 1290 1229 1218 1320 1912 Interest 1032 1428 1290 1326 1309 1227 Arrears 0 510 0 0 0 0 TOTAL DUE TO BANKS 1349 1670 1950 3423 2751 949 Principal 325 877 1195 2786 2320 653 Interest 1025 793 755 638 431 297 TOTAL DUE TO OTHERS 712 864 869 816 664 487 Principal 224 492 504 447 302 112 Interest 488 372 365 369 362 375 TOTAL DUE TO UNSPECIFIED CREDITORS 0 1095 5427 9386 15134 20996 Principal 0 0 0 0 0 80 Interest 0 102 460 911 1597 2413 Arrears 0 993 4966 8475 13537 18502 ----------------------------------------------------------------------- TOTAL FINANCING GAP 993 4966 8475 13537 18502 22850 Of which unpaid interest* 445 804 581 612 1024 1591 ---------------------------------------------------------------------------- TOTAL PAYMENT CAPACITY 2100 1890 2290 2632 2675 2720 I)EARNED 1700 1500 1540 1582 1625 1670 a) Trade Balance 1000 1000 1040 1082 1125 1170 Exports** 5620 5800 6032 6273 6524 6785 Imports** 4620 4800 4992 5192 5399 5615 b) Services and Tranfers, net 600 400 400 400 400 400 (excluding interest) c) Interest Earnings 100 100 100 100 100 100 II)BORROWED*** 400 390 750 1050 1050 1050 a)New Credits (Medium & Long Term) 200 290 650 950 950 950 b)Short Term Credits & Recycled 200 100 100 100 100 100 Interest, Net ------------------------------------ TOTAL DEBT 28200 29045 30239 31570 33232 35305 37947 Of which new borrowed 400 790 1540 2590 3640 4690 ----------------------------- ------------------------------------------------------------------ Libor Rate 8.5% 6.8% 7.5% 8.6% 9.4% 10.4% Footnotes: * Negative values for unpaid interest equal the extent to which payment capacity exceeds interest due and can be applied to repayments of principal. ** Exports and Imports are estimated to grow by 4 percent beginning in 1987. *** Terms for the repayment of new borrowings were assumed to be a 5 year grace and a 5 year principal repayment period. Sanitized Copy Approved for Release 2011/02/23: CIA-RDP86T01017R000303300001-1 Sanitized Copy Approved for Release 2011/02/23: CIA-RDP86T01017R000303300001-1 TABLE 2 SENSITIVITY ANALYSIS, MILLION US DOLLARS AS OF 1/13/86 SCENARIO: BASELINE (CIA ESTIMATES) Years 1985 1986 1987 1988 1989 1990 TOTAL DEBT* Baseline LIBOR 29045 30239 31570 33232 35305 37947 Baseline LIBOR + 1% 29045 30533 32205 34257 36796 39998 Baseline LIBOR + 2% 29045 30826 32846 35301 38328 42126 Baseline LIBOR + 3% 29045 31120 33492 36365 39904 44333 FINANCING GAP* Baseline LIBOR 993 4966 8475 13537 18502 22850 Baseline LIBOR + 1% 993 5260 9110 14562 19993 24901 Baseline LIBOR + 2% 993 5554 9750 15607 21525 27029 Baseline LIBOR + 3% 993 5847 10397 16670 23101 29237 AMOUNT OF ADDITION AL DEBT OR GAP Between LIBOR & LIBOR + 1% 0 294 635 1025 1491 2051 Between LIBOR + 1% & LIBOR + 2% 0 294 641 1044 1533 2128 Between LIBOR + 2% & LIBOR + 3% 0 294 647 1064 1575 2208 ---------------------------------------------------------------------------- TOTAL DEBT ** Baseline Export Projection 29045 30239 31570 33232 35305 37947 Baseline Export Projection + 1% 29045 30183 31392 32855 34636 36871 Baseline Export Projection + 2% 29045 30127 31213 32473 33954 35769 Baseline Export Projection + 3% 29045 30070 31033 32086 33259 34639 FIANANCING GAP** Baseline Export Projection 993 4966 8475 13537 18502 22850 Baseline Export Projection + 1% 993 4910 8297 13160 17833 21775 Baseline Export Projection + 2% 993 4854 8118 12778 17151 20672 Baseline Export Projection + 3% 993 4798 7938 12391 16456 19542 AMOUNT OF ADDITIONAL DEBT OR GAP Between B.E.P. & B.E.P. + 1% 0 -56 -178 -377 -669 -1075 Between B.E.P. + 1% & B.E.P. + 2% 0 -56 -179 -382 -682 -1102 Between B.E.P. + 2% & B.E.P. + 3% 0 -56 -180 -387 -695 -1130 Footnotes: * Assuming changes in LIBOR beginning in 1986. ** Assuming changes in export growth beginning in 1986. Sanitized Copy Approved for Release 2011/02/23: CIA-RDP86T01017R000303300001-1 Sanitized Copy Approved for Release 2011/02/23: CIA-RDP86T01017R000303300001-1 TABLE 3 POLAND: PAYMENTS DUE TO CREDITORS IN MILLION US DOLLARS AS OF 1/13/86 SCENARIO: BASELINE (CIA ESTIMATES) AND RESCHEDULING OF FINANCING GAPS Years Terms 1985 1986 1987 1988 1989 1990 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- TOTAL PAYMENTS DUE TO CREDITORS 3093 5863 5799 7694 7640 7267 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- TOTAL PRINCIPAL DUE 549 2659 2928 4450 3942 2955 TOTAL INTEREST DUE 2545 2694 2871 3244 3698 4311 TOTAL ARREARS 0 510 0 0 0 0 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- TOTAL DUE TO GOVERNMENTS 1032 3228 2519 2543 2628 3139 Principal 0 1290 1229 1218 1320 1912 Interest 1032 1428 1290 1326 1309 1227 Arrears 0 510 0 0 0 0 TOTAL DUE TO BANKS 1349 1670 1950 3423 2751 949 Principal 325 877 1195 2786 2320 653 Interest 1025 793 755 638 431 297 TOTAL DUE TO OTHERS 712 864 869 816 664 487 Principal 224 492 504 447 302 112 Interest 488 372 365 369 362 375 TOTAL DUE TO UNSPECIFIED CREDITORS 0 102 461 911 1597 2692 Principal 0 0 0 0 0 279 Interest 0 102 460 911 1597 2413 Arrears 0 0 0 0 0 0 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- TOTAL FINANCING GAP 0 0 0 0 0 0 Of which unpaid interest* -548 -3169 -2928 -4450 -3941 -2956 ---------------------------------------------------------------------------- - TOTAL PAYMENT CAPACITY 3093 5863 5799 7694 7640 7267 I)EARNED 1700 1500 1540 1582 1625 1670 a) Trade Balance 1000 1000 1040 1082 1125 1170 Exports** 5620 5800 6032 6273 6524 6785 Imports** 4620 4800 4992 5192 5399 5615 b) Services and Tranfers, net 600 400 400 400 400 400 (excluding interest) c) Interest Earnings 100 100 100 100 100 100 II)BORROWED*** 1393 4363 4259 6112 6015 5597 a)New Credits (Medium & Long Term) 200 290 650 950 950 950 b)Short Term Credits & Recycled 200 100 100 100 100 100 Interest, Net c)Rescheduling Agreements 993 3973 3509 5062 4965 4547 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- TOTAL DEBT 28200 29045 30239 31570 3332 35305 37947 Of which new borrowed 1393 5756 10015 16127 22142 27739 ---------------------------------------------------------------- Libor Rate 8.5% 6.8% 7.5% 8.6% 9.4% 10.4% Footnotes: * Negative values for unpaid interest equal the extent to which payment capacity exceeds interest due and can be applied to repayments of principal. ** Exports and Imports are estimated to grow by 4 percent beginning in 1987. *** Terms for the repayment of new borrowings and reschedulings were assumed to be a 5 year grace and a 5 year principal repayment period. Sanitized Copy Approved for Release 2011/02/23: CIA-RDP86T01017R000303300001-1 Sanitized Copy Approved for Release 2011/02/23: CIA-RDP86T01017R000303300001-1 TABLE 4 SENSITIVITY ANALYSIS, MILLION US DOLLARS AS OF 1/13/86 SCENARIO: BASELINE (CIA ESTIMATES) AND RESCHEDULING OF FINANCING GAPS Years 1985 19 86 1987 1988 1989 1990 TOTAL DEBT* Baseline LIBOR 29045 302 39 31570 33232 35305 37947 Baseline LIBOR + 1% 29045 3053 3 32205 34257 36796 39998 Baseline LIBOR + 2% 29045 3082 6 32846 35301 38328 42126 Baseline LIBOR + 3% 29045 3112 0 33492 36365 39904 44333 AMOUNT OF ADDITIONAL DEBT Between LIBOR & LIBOR + 1% 0 29 4 635 1025 1491 2051 Between LIBOR + 1% & LIBOR + 2% 0 29 4 641 1044 1533 2128 Between LIBOR + 2% & LIBOR + 3% 0 29 4 647 1064 1575 2208 RESCHEDULING AGREEMENTS* Baseline LIBOR 993 397 3 3509 5062 4965 4547 Baseline LIBOR + 1% 993 426 7 3850 5452 5431 5107 Baseline LIBOR + 2% 993 456 1 4196 5857 5918 5703 Baseline LIBOR + 3% 993 485 4 4550 6273 6431 6334 AMOUNT OF ADDITIONAL FUNDS Between LIBOR & LIBOR + 1% 0 29 4 341 390 466 560 Between LIBOR + 1% & LIBOR + 2% 0 29 4 346 405 487 596 Between LIBOR + 2% & LIBOR + 3% 0 29 3 354 416 513 631 ---------------------------------------------------------------------------- TOTAL DEBT ** Baseline Export Projection 29045 Baseline Export Projection + 1% 29045 Baseline Export Projection + 2% 29045 Baseline Export Projection + 3% 29045 30239 30183 30127 30070 31570 31392 31213 31033 33232 32855 32473 32086 35305 34636 33954 33259 37947 36871 35769 34639 AMOUNT OF ADDITIONAL DEBTS Between B.E.P. & B.E.P. + 1% 0 -56 -178 -377 -669 -1075 Between B.E.P. + 1% & B.E.P. + 2% 0 -56 -179 -382 -682 -1102 Between B.E.P. + 2% & B.E.P. + 3% 0 -56 -180 -387 -695 -1130 RESCHEDULING AGREEMENTS** Baseline Export Projection 993 3973 3509 5062 4965 4547 Baseline Export Projection + 1% 993 3917 3387 4863 4673 4140 Baseline Export Projection + 2% 993 3861 3264 4660 4373 3720 Baseline Export Projection + 3% 993 3805 3140 4453 4065 3285 AMOUNT OF ADDITIONAL FUNDS Between B.E.P. & B.E.P. + 1% 0 -56 -122 -199 -292 -407 Between B.E.P. + 1% & B.E.P. + 2% 0 -56 -123 -203 -300 -420 Between B.E.P. + 2% & B.E.P. + 3% 0 -56 -124 -207 -308 -435 ---------------------------------------------------------------------------- Footnotes: * Assuming changes in LIBOR beginning in 1986. ** Assuming changes in export growth beginning in 1986. Sanitized Copy Approved for Release 2011/02/23: CIA-RDP86T01017R000303300001-1 Sanitized Copy Approved for Release 2011/02/23: CIA-RDP86T01017R000303300001-1 TABLE 5 POLAND: PAYMENTS DUE TO CREDITORS IN MILLION US DOLLARS AS OF 1/13/86 SCENARIO: OPTIMISTIC (POLISH ESTIMATES) Years Terms 1985 19 86 1987 1988 1989 1990 ---------------------------------- TOTAL PAYMENTS DUE TO CREDITORS ------- ------ 3093 64 40 -------- 8825 11858 13266 12296 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- TOTAL PRINCIPAL DUE 549 26 59 2928 4450 3942 2763 TOTAL INTEREST DUE 2545 26 68 2787 3073 3406 3847 TOTAL ARREARS 0 11 13 3110 4335 5918 5686 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- TOTAL DUE TO GOVERNMENTS 1032 3228 2519 2543 2628 3139 Principal 0 1290 1229 1218 1320 1912 Interest 1032 1428 1290 1326 1309 1227 Arrears 0 510 0 0 0 0 TOTAL DUE TO BANKS 1349 1670 1950 3423 2751 949 Principal 325 877 1195 2786 2320 653 Interest 1025 793 755 638 431 297 TOTAL DUE TO OTHERS 712 864 869 816 664 487 Principal 224 492 504 447 302 112 Interest 488 372 365 369 362 375 TOTAL DUE TO UNSPECIFIED CREDITORS 0 679 3487 5076 7222 7721 Principal 0 0 0 0 0 86 Interest 0 75 377 741 1304 1950 Arrears 0 603 3110 4335 5918 5686 ---------------------------------------------------------------------------- TOTAL FINANCING GAP 603 3110 4335 5918 5686 4466 Of which unpaid interest* 55 -662 -1703 -2867 -4174 -3983 ---------------------------------------------------------------------------- - TOTAL PAYMENT CAPACITY 2490 3330 4490 5940 7580 7830 I)EARNED 2060 2160 2280 2500 2630 2770 a) Trade Balance 1270 1540 1660 1780 1910 2050 Exports 5650 6170 6620 7100 7620 8180 Imports 4380 4630 4960 5320 5710 6130 b) Services and Tranfers, net 670 500 500 600 600 600 (excluding interest) c) Interest Earnings 120 120 120 120 120 120 II)BORROWED** 430 1170 2210 3440 4950 5060 a)New Credits (Medium & Long Term) 280 970 2010 3140 4650 4660 b)Short Term Credits & Recycled 150 200 200 300 300 400 Interest, Net ------------------------------------------------------------------------ TOTAL DEBT 28200 28685 29193 29700 30273 31049 32126 Of which new borrowed 430 1600 3810 7250 12200 17260 ------------------------------------------------------------------------- Libor Rate 8.5% 6.8% 7.5% 8.6% 9.4% 10.4% Footnotes: * Negative values for unpaid interest equal the extent to which payment capacity exceeds interest due and can be applied to repayments of principal. ** Terms for the repayment of new borrowings were assumed to be a 5 year grace and a 5 year principal repayment period. Sanitized Copy Approved for Release 2011/02/23: CIA-RDP86T01017R000303300001-1 Sanitized Copy Approved for Release 2011/02/23: CIA-RDP86T01017R000303300001-1 TABLE 6 SENSITIVITY ANALYSIS, MILLION US DOLLARS AS OF 1/13/86 SCENARIO: OPTIMISTIC (POLISH ESTIMATES) Years 1985 1986 1987 1988 1989 1990 TOTAL DEBT* Baseline LIBOR 28685 29193 29700 30273 31049 32126 Baseline LIBOR + 1% 28685 29483 30320 31264 32471 34058 Baseline LIBOR + 2% 28685 29773 30947 32273 33935 36065 Baseline LIBOR + 3% 28685 30063 31579 33302 35440 38149 FINANCING GAP* Baseline LIBOR 603 3110 4335 5918 5686 4466 Baseline LIBOR + 1% 603 3400 4955 6909 7108 6398 Baseline LIBOR + 2% 603 3690 5582 7919 8572 8405 Baseline LIBOR + 3% 603 3980 6214 8947 10077 10489 AMOUNT OF ADDITIONAL DEBT OR GAP Between LIBOR & LIBOR + 1% 0 290 621 991 1423 1932 Between LIBOR + 1% & LIBOR + 2% 0 290 626 1010 1464 2007 Between LIBOR + 2% & LIBOR + 3% 0 290 632 1029 1505 2084 ---------------------------------------------------------------------------- TOTAL DEBT ** Baseline Export Projection 28685 29193 29700 30273 31049 32126 Baseline Export Projection + 1% 28685 29136 29516 29873 30322 30934 Baseline Export Projection + 2% 28685 29080 29331 29468 29583 29712 Baseline Export Projection + 3% 28685 29023 29145 29059 28829 28460 FINANCING GAP** Baseline Export Projection 603 3110 4335 5918 5686 4466 Baseline Export Projection + 1% 603 3053 4151 5519 4959 3273 Baseline Export Projection + 2% 603 2997 3966 5114 4220 2051 Baseline Export Projection + 3% 603 2940 3779 4704 3466 800 AMOUNT OF ADDITIONAL DEBT OR GAP Between B.E.P. & B.E.P. + 1% 0 -56 -184 -400 -726 -1192 Between B.E.P. + 1% & B.E.P. + 2% 0 -57 -185 -405 -740 -1222 Between B.E.P. + 2% & B.E.P. + 3% 0 -57 -186 -410 -753 -1252 ---------------------------------------------------------------------------- Footnotes: * Assuming changes in LIBOR beginning in 1986. ** Assuming changes in export growth beginning in 1986. Sanitized Copy Approved for Release 2011/02/23: CIA-RDP86T01017R000303300001-1 Sanitized Copy Approved for Release 2011/02/23: CIA-RDP86T01017R000303300001-1 Figure 1 and an article assessing Polish Export Potential Sanitized Copy Approved for Release 2011/02/23: CIA-RDP86T01017R000303300001-1 Sanitized Copy Approved for Release 2011/02/23: CIA-RDP86T01017R000303300001-1 POLAND: Gross Debt In The Baseline Scenario And Sensitivity Analysis. Billion US $ LIBOR + 1% 20 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 Sanitized Copy Approved for Release 2011/02/23: CIA-RDP86T01017R000303300001-1 Sanitized Copy Approved for Release 2011/02/23: CIA-RDP86T01017R000303300001-1 Poland: Dim Prospects for Increasing Hard Currency Earnings One of the Polish Government's primary goals over the next five years is to increase hard currency earnings, but given the lack of effective export promotion policies any significant increase is un- likely. Incentives to export are few, and the regime does not channel adequate investment to those industries that are potential hard currency earners. The regime may tinker with its policies, but inter- nal pressures to increase consumption rather than exports and weak Western demand for Polish prod- ucts are likely to thwart any major export cam- paign. Inadequate Export Incentives The 3-percent decline in hard currency exports in the first nine months of 1985 compared with the same period in 1984 partly reflects Warsaw's inef- fective export policy. There is little incentive to export or to introduce quality products given high domestic demand. In a recent survey, more than 40 percent of all firms expressed no interest in export- ing. With easier and more profitable sales available on the domestic market, few firms are willing to undertake costly overseas marketing. The regime has not carried through on its economic reform policy, which-at least on paper-tied a firm's imports of Western raw materials and capi- tal equipment to its export revenues. Central allo- cations of export funds remain the most common method for financing imports as the programs designed to promote exports have faltered: ? The hard currency retention fund-intended to finance more than half of all hard currency imports-had little impact because the share of hard currency earnings that may be retained is too small to encourage most firms to accept the difficulties of becoming an exporter. Hard Currency Retention Funds: ? Permit firms to keep an average 20 percent of export earnings to fund imports. ? Restrict purchases to raw materials and capital equipment essential to export production. ? Are held by 40 percent offirms. ? Financed 15 percent of imports in 1984. 25X1 Foreign Trade Rights: ? Allow firms to conduct trade directly without the aid of foreign trade organizations. ? Have been granted to about 300f-rms. ? Accounted for about 7 percent of exports in 1984. Foreign Exchange Export Credit System: ? Allows firms to obtain loans from Bank Hand- lowy, the foreign trade bank, to purchase the machinery and equipment necessary to develop hard currency exports. 25X1 ? Funded 0.5 percent of imports in 1984, but probably about 2 percent in 1985. 25X1 ? The program to grant enterprises foreign trade rights has not succeeded because most firms find it easier to deal with foreign trade organizations that possess the foreign trading skill, trained personnel, and networks of established markets they lack. In addition, the Ministry of Foreign Trade excludes firms from entering markets in which foreign trade organizations already operate. ? The foreign exchange export credit system re- ceives little use by firms because of the high interest rates charged on the limited funds avail- able. Sanitized Copy Approved for Release 2011/02/23: CIA-RDP86T01017R000303300001-1 Sanitized Copy Approved for Release 2011/02/23: CIA-RDP86T01017R000303300001-1 Several other policies limit export incentives. The National Bank of Poland, for example, recently failed to implement a promised reduction in the high taxes levied on hard currency earners. The regime also delayed a reform tying wage hikes to increases in exports. Despite inadequate export performance, some offi- cials have opposed additional export incentives, especially further devaluations of the zloty. The zloty has been devalued from 80 to 159 to the dollar in the last four years, but many Polish economists believe a rate of about 600 to the dollar is required to bring domestic prices in line with world prices. The regime probably is reluctant to devalue, however, because of the inflationary im- pact and concern that increased exports would depress consumer supplies. Even with more effective policies, Poland is not well positioned in markets with high growth potential. More than three-fourths of Polish hard currency in 1984 was earned through exports of coal, copper and other metals, machinery and parts, chemicals. and processed food. Warsaw's plans to increase exports to the West by 7 percent annually in 1986- 90 appear excessively optimistic, given prospects in its leading export markets: ? Even the Poles see marginal growth potential for the extractive industries in the next five years. Output of coal, copper, and sulfur will stagnate, and production costs will escalate due to past inadequate investment. Moreover, pleas to con- serve fuels and raw materials have been largely ignored. Stagnant demand for many raw materi- als on the world market, competition from other suppliers, and possible protectionist measures by West Europeans also may constrain sales of these products. ? Plans to increase exports of processed foods, especially meat, at rapid rates during 1986-90 hinge on increased production, reversal of past neglect of storage, packaging, and transport facil- ities, and the development of improved marketing Poland: Hard Currency Exports in 1984 Fuel and energy products 26.6 Machinery and equipment 19.8 - strategies. Increasing meat exports, however. risks consumer protests against draining domestic supplies. Moreover, agricultural exports are vul- nerable to the uncertainties of weather and West- ern import restrictions. ? A rapid expansion of exports of higher priced specialty chemicals is targeted at foreign high- growth industries, such as electronics, pharma- ceuticals. fertilizers, and pesticides. The econom- ic plan, however, does not provide the investments needed to increase output of these goods. ? Past experience suggests that Warsaw's plans to boost exports of machinery and spare parts in the next five years will prove unrealistic. In the first nine months of 1985, exports of machinery to the West were only 50 percent of the annual plan. Moreover, the newly industrialized countries. with better quality control and marketing chan- nels than Poland, sell the same low-technology Sanitized Copy Approved for Release 2011/02/23: CIA-RDP86T01017R000303300001-1 Sanitized Copy Approved for Release 2011/02/23: CIA-RDP86T01017R000303300001-1 Poland: Planned Growth of Hard Currency Exports. 1986-90 Shaded portion represents a range 0 5 Ii.trd currency esp-irts Extractive industry Food processing Chemicals Machinery and equipment machinery. Failure to develop new products, im- port new industrial components on a large scale, and buy production licenses from Western firms, have widened Poland's technology gap and will continue to hamper export competitiveness. Exports of services also will show little improve- ment for hard currency earnings beyond the S400 million earned in 1984. Warsaw hopes for substan- tial future growth in tourism earnings, but consid- erable investment in hotels and services is required. Most tourist agencies agree that Polish prices are high compared to other East European countries and accommodations and services fall below West- ern standards. While the export of construction services has some potential, given a revival of investment in the Third World, Warsaw must adapt better to demand and develop an area of expertise. Poland's geographic location otTers po- tential for increasing transit services, but invest- ment and marketing are required. The outlook for the export of technical know-how is even less promising-Poland's outdated technology base pro- duces few patents that are licensed on a world basis. For example, less than 2 percent of all Polish inventions have foreign patents compared to 10 percent of East German and 60 percent of Dutch inventions. We expect Poland's hard currency export earnings to increase marginally at best in the next five years. The regime shows no signs that it will redirect investment funds from outdated projects to those industries with the most hard currency export earning potential or greatly increase export incen- tives for firms. Nor does a drastic devaluation appear in the offing because of regime fears of a domestic prices. negative public reaction to large increases in 25X1 25X1 The regime's proposed export incentives are unlike- ly to bring major improvement. For example, War- saw plans to establish a Foreign Trade Develop- ment Bank to provide loans for developing potential exports, to raise a firm's share under the hard currency retention fund, and to grant tax and tariff concessions. The Poles also are encouraging joir25X1 ventures with the West, especially in the metals and machinery sectors, but Western firms appear reluctant to participate due to past problems and government policies. In addition, prospects for re- newing old contracts, which nearly all expire by 1987, are gloomy because Western companies are phasing out the older products now made in cooper- 25X1 Domestic pressure to increase consumption more than exports to either the West or East is another major impediment to export growth. As in the past, the regime probably will yield to consumer de- mands and permit consumption to grow by more than the 2-percent annual rate planned for the next five years. Such concessions would mean even less Sanitized Copy Approved for Release 2011/02/23: CIA-RDP86T01017R000303300001-1 Sanitized Copy Approved for Release 2011/02/23: CIA-RDP86T01017R000303300001-1 Contradictory Export Policies The Polish Government has not conducted an effective export campaign, and at tunes its actions have had an unintended opposite effect. For exam- ple, the regime in 1985: ? Ordered an exporter of light bulbs to decrease sales abroad by $2 million because of domestic needs. ? Denied permission for a dairy to process and export long-life milk because the equipment to process the milk was leased from a Western firm rather than purchased outright. ? Delayed for almost two years expansion on aban- doned property of a factorv producing air gliders. resulting in a $100,000 loss in export revenue and penalties for breach of contract to Western importers. Although behavior in these examples appears irra- tional, in each case the regime made these deci- sions by focusing on other priorities. especial! v consumer needs. export revenue to repay the debt. Despite creditor demands to increase export revenues, their lack of leverage over Poland means the regime most likely will ignore the protests. 25X1 25X1 14 25X1 Sanitized Copy Approved for Release 2011/02/23: CIA-RDP86T01017R000303300001-1 ? Sanitized Copy Approved for Release 2011/02/23: CIA-RDP86T01017R000303300001-1 DISTRIBUTION: (MEMO) (5) IMCJCB (rm. 7G07) (1) E. Mark Linton (DEPT. of STATE)-(requestor) t (1) Harvey Shapiro (DEPT. of TREASURY) (2) EUR/PS (1 sourced) (1) EW Branch Chrono (1) EW Branch Files Sanitized Copy Approved for Release 2011/02/23: CIA-RDP86T01017R000303300001-1