351. Paper Prepared in the Office of Policy Development and Analysis, Bureau of Program and Policy Coordination, Agency for International Development1
The Energy Crisis: A Review of the Additional Resource Needs of the Hardest Hit LDCs
[Omitted here are a title page and table of contents.]
I. The Effect of the Energy Crisis on the LDCs
The increase in oil prices announced in October and December, 1973, poses serious problems of economic adjustment for all oil importing countries. For the LDCs, the energy problem combined with scarcity of food supplies will create severe balance of payments and growth problems.
The first problem facing LDCs in the short run is how to finance the increased cost of petroleum and related commodity imports. Most LDCs have been able to assure themselves of oil supplies, but if present prices for crude petroleum are maintained, LDC payments to import the same volume of oil as last year would increase by $9 billion, at a $9–10 price (c.i.f.), while the projected current account deficit at this price is about $22 million.
In addition to the impact of higher oil prices, many of the poorer developing countries are also affected by the reduced availability and higher costs of fertilizer and by higher grain prices in general. The World Bank has recently estimated that LDC imports of cereals increased from an average level of about $3 billion in 1970–72 to over $8 billion in 1973. (Part of this rise reflects an increase in import volumes due to poor harvests in many of the LDCs, although most of the increase is due to higher prices.)
Finally, LDC exports to their markets in the U.S. and other industrial countries may suffer from the projected slowdown in economic activity in these countries in the next few months, thus reducing LDC capacity to meet their projected higher import bill.
The above estimates, however, overstate the magnitude of the real problem in the short run, because a good number of the LDCs may be able to manage financing their increased oil bill for a variety of reasons: [Page 994]
- —Some LDCs are only marginal net importers or exporters of oil—for example, Mexico, Argentina, Colombia;
- —Still others are likely to benefit from increased prices of other raw materials which will compensate them for the increase in the oil price—for example, Malaysia–rubber; Thailand–rice.
- —Finally, a few LDCs are favored with both ample foreign exchange reserves and ready access to private capital markets which will help them to meet the higher payments for oil—for example, Brazil; Korea.
The problem is concentrated in a number of LDCs which, in addition to higher food and oil prices, have neither the reserves nor the capacity to borrow, nor do they expect offsetting price increases in their other exports. This short paper outlines the magnitude of the problem faced by these countries and makes an attempt to identify the timing over which this problem will become most severe. The overall discussion concerns only the short run and is limited to projections for 1974 and, in some instances where data are available, for 1975.
II. Problems Faced by the Hardest Hit LDCs
The group of LDCs which can be expected to suffer serious dislocations in the absence of short-run assistance include countries which suffer from a combination of problems. Either they are severely affected by the energy crisis, and/or they find themselves in such a precarious economic position that any adverse impact, such as an increase in oil prices, will generate significant economic dislocations, although the actual increase in oil cost may not by itself create a major financing problem. On the basis of information provided by a survey of U.S. Embassies and A.I.D. Missions abroad, as well as projections by the World Bank and the IMF and our own estimates, the twenty-five countries listed in Table 1 are going to be seriously affected, with the major impact of the financial crisis being felt in 1974 and 1975. The table also shows the amounts of additional outside financing needed for 1974.
LDCs Hardest Hit by the Energy Crisis
|Bangladesh||Honduras||Sahel Countries:||Sri Lanka|
Projections and a summary table of the financial situation in these countries can be found in the attached individual country tables. Details [Page 995] on each of these countries can be found in Annex 1.2 For some of the countries only limited data are available; thus it is impossible to provide any meaningful quantitative estimates of the magnitude of the financial problem that they face. However, these countries (Botswana, Cambodia, Guyana, Ivory Coast, Lesotho, Sahel Sudan, Swaziland) are all relatively small, so the total magnitude of their financing requirements is also small by comparison to the needs of the rest of the countries in the group.
On the basis of 1974 projections, the total amount of financing needed for the group of thirteen hardest hit countries on which detailed projections are available is approximately $3.2 billion; to this one must add approximately $200–250 million3 to cover the needs of the countries on which information is scant, for a total of about $3.4 billion. This estimate is based on projections of exports and imports as well as long-term capital likely to be otherwise available to these countries. Estimates of long-term capital are based essentially on either what was available last year or on more recent 1974 projections for individual countries made by the A.I.D. Missions.
LDCs, however, have at their disposal some means of financing a portion of this gap. It was assumed that they could borrow from the IMF in 1974, at least through their gold tranche as well as one credit tranche. For countries whose IMF position is already in the credit tranches, it was assumed that they could borrow one more credit tranche through 1974. Similarly, it was assumed that countries would use up their reserves at a rate which would result in their holding, at the end of 1974, at most reserves equal to two months’ imports (of goods only). These appear to us to be fairly drastic assumptions, but given the predicament that these countries might find themselves in, one could expect that they would take all possible measures at their disposal to address the financing problems they face. After taking account of these possibilities for financing, the total remaining amount to be financed is approximately $2.3 billion. Financing of this remainder must be undertaken on concessionary terms, because both the overall credit worthiness of the countries and their precarious financial position almost certainly preclude their being able to obtain this financing on commercial terms; and even if they were able to finance some portion of this through borrowing on commercial terms, it would be inadvisable for them to do so.[Page 996]
For 1975 it is impossible to obtain quantitative estimates of the financing needs of the countries involved. However, it must be stressed that if in fact they draw down their reserves in a manner assumed during 1974 to meet their urgent financing needs, then they would obviously be less able to finance recurring deficits in 1975. The same, to some extent, holds true for obtaining financing from the IMF through 1975, although it could be assumed that one additional credit tranche could be obtained from the IMF for that year.
The largest financing difficulties will be faced by India, Pakistan, Jamaica, and Chile. These countries are likely to account for 80% of the total additional financing needed in 1974. For some of these countries there are some possibilities of obtaining financing from OPEC. Specifically, the most certain of these arrangements is the one between Iran and India, where India would be expected to obtain approximately $100 million worth of financing assistance for oil in 1974 and a similar amount in 1975. Additionally, a similar-sized credit is being negotiated with Iraq which, however, has not yet materialized. Chile is certain to obtain a major debt rescheduling this year. It is also possible that the Central American countries will obtain financing from Venezuela; however, since much of this funding is expected to be through the IDB, it is likely to be long-term and project-oriented. While preliminary discussions between these countries have already occurred, no actual credit arrangement has been concluded as of the present date. Pakistan may also obtain financing from some OPEC countries, but no agreement is known to exist at present.
It is expected that most of these countries will face a financing problem in late 1974, with the most urgent need arising in Chile, India, Pakistan, Jamaica, and Bangladesh. Additional details on timing of the problem can be found in the discussion of the individual countries in the attached tables and Annex 1. There are some countries which are likely to be able to manage through 1974, for a variety of reasons, but may face difficulties starting in 1975 if present import price levels are maintained. These include Uruguay, Kenya, and Central America.
- Source: National Archives, Nixon Presidential Materials, NSC Files, Box 321, Subject Files, Energy Crisis, Part 2, April 74. No classification marking. Drafted by Keith E. Jay and Constantine Michalopoulos (PPC/PDA/TP).↩
- The tables and Annex 1 are attached but not printed.↩
- This estimate is based solely on the projected increased cost in financing oil imports for these countries. It was assumed that these countries would maintain the same volume of imports but that their price would rise from approximately $3.40 to $9–12 per barrel, depending on the country’s experience. [Footnote in the original.]↩