FILE CP R E STR I CTE D R e p o r t N o. AS-63 This report was prepared for use within the Bank. In making it available to others, the Bank assumes no responsibility to them for the accuracy or completeness of the information contained herein. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT QUARTERLY ECONOMIC REVIEW No. 8 and 9 September 1957 Department of Operations South Asia and Middle East EXCHANGE RATES IN TERMS OF U.S. DOLLARS INDIA - rupee . $0.21 PAKISTAN - rupee = $ 0.21 IRAN - rial $0.0132 IRAQ - dinar $ 2.80 SYRIA - pound $ 0.28 JORDAN - dinar $ 2.80 LEBANON - pound = $0.31 EGYPT - pound $ 2.87 SUDAN - pound = $ 2.87 ETHIOPIA - dollar $ 0.4025 TABLE OF CONrENTS Page INDIA ............. o ........................... 1 PAKISTAN .................................. 6 IRAN .................................... 9 IRAQ ........ 13 SYRIA . 16 JORDAN .......... . 18 LEBANON ... 20 EGYPT ... 22 SUDA.NI..... 26 ETHIOPIA .... o ... 29 I N D I A The drain on India's foreign exchange reserves continues. In April the average weekly loss (including use of Ii1W credits) was about Rs. 55 million, in May Rs. 100 million, in June Rs. 90 million, in July Rs. S0 million and in the four weeks ending August 23 Rse. 90 million. During the latter period Burma drew the second half of the Es. 200 million loan negotiated with India in 1956; if these drawings are excluded, the weekly loss in August is reduced to about Rs. 65 million. Early in August the foreign exchange hold- ings of the Reserve Bank of India fell below the level of Rs. 4 billion, which is the statutory minimum required for currency backing, and the Govern- ment made use of its powers under the Reserve Bank of India Act temporarily to reduce the reserve requirement to Rs. 3 billion. New legislation would be necessary to go below the latter figure. If gold is included, India's external reserves on August 23 amounted to Rs. 5.02 billion ($1,054 million). At the same date liabilities to the flB totalled Rs. 0.95 billion ($200 million), while Burma owed India Rs. 0.20 billion ($42 million), half of which is due to be repaid by the end of the Second Five-Year Plan. While detailed balance of payments statistics only go up to the end of March, it is clear that the continuance of the foreign exchange deficit in recent months is primarily attributable to heavy payments for imports of capital goods and industrial materials and components. Exports have probably been running at about the same level as last year. Exports of tea and cotton textiles did exceptionally well in the first quarter of this year, but tea prices have since fallen sharply, and the market for jute manufactures has been rather weak. Exports of raw cotton and vegetable oils have been restricted to conserve supplies for home use, and exports of ores have been held up by transport difficulties. Against this India is exporting substantial quantities of sugar this year, and exports of light engineering goods and handicraft products, while still small, appear to be increasing steadily. Further restrictions on imports were introduced at the beginning of July. Most Open General Licences were suspended for three months, quotas for less essential goods were reduced or eliminated altogether, and a ban was maintained on imports of capital goods outside the "core" of the Second Five- Year Plan, except where special arrangements can be made with suppliers to cover the foreign exchange costs.* However, with the heavy import commitments entered into last year and with a large number of valid import licences still outstanding in the private sector, recent measures have done little yet to stem the flood of payments. The present widespread expectations of exchange rate adjustments between the major wrorld currencies have no doubt also played their part in increasing the pressure on India's balance of payments in various ways. The high level of demand for imports has been associated with a large budgetary deficit, which has been mainly financed through the issue of Treasury Bills. In the three months April-June the rupee investments of the Reserve Bark increased by Rs. 1.35 billion, the Reserve Bank's loans and advances to Governments rose by Rs. 0.16 billion and government deposits with * The "core" of the Plan, as defined by the Finance iMinister, consists of "steel, coal, transport and ancillary power". - 1 - - 2- the Reserve Bank were reduced by Rs. 0.36 billion. After allowing for a fall of Rs. 0.15 billion in commercial bank holdings of government securities, the net expansicnary effect of government transactions was Rs. 1.72 billion, compared with Rs. 0.44 billion in the same period of 1956. Bank credit to the private sector also increased in April-June this year - by Rs. 0.22 billion. Howrever, part of the expansion of credit to the Government and the private sector was neutralized by a rise of Rs. 0.79 billion in time liabil- ities of the banks. As a result of this and of the foreign exchange deficit the increase in active money supply during the three months was limited to Rs. 0.40 billion, compared with an increase of Rs. 0.05 billion in April-June last year. Agricultural production in the year ending June 1957 appears, from the limited data so far available, to have been 4% or 5% higher than in the previous year, record rice and sugar crops being responsible for most of the increase. Output of foodgrains probably increased by 2-3 million tons over the level of 63.4 million tons reached in 1955/56.* The latest statistics of industrial production (for the first quarter of 1957) suggest that it is continuing to rise at a rate of about 8% or 9% a year. Most industries have shared in this increase, with the notable exception of jute manufactures. Coal output, which has been rather stagnant in recent years, increased sub- stantially in the first quarter of 1957; and cotton textiles, sugar manu- facture, cement and automobiles were other industries which did particularly well during this period. The rising levels of production and investment and the need for large movements of cereals and sugar have put severe strains on India's internal transport system. The railways continue to operate under pressure, and frequent delays are experienced. The situation in the ports is even more critical. The simultaneous arrival during the summer of ships diverted around the Cape and sh-ips coming through the reopened Suez Canal led to un- precedented congestion at Bombay, Calcutta and Madras, and the situation was further aggravated by labor troubles at the first two ports. At one time as many as 100 ships were waiting for berths at the ports, and the number is still very high. Urgently needed imports of food and capital goods have been delayed, exports (particularly of ores) have been impeded, and the shipping lines have talked of imposing a special surcharge on freight to and from India, although they have apparently agreed to defer action on this for the time being in the hope that conditions will improve. Internal price movements have reflected the inflationary strains to which the economy has been subjected this year. The index of wholesale prices rose by 2% in April and 3% in MIay, remained steady in June and rose by 1-1/2% in July; at the end of July it was 6% higher than at the end of March and 8% higher than in July 1956. M4ost of the rise in recent months has been attribut- able to food; wholesale prices of manufactures have changed little. Local food shortages occurred during the summer in Uttar Pradesh, Bihar and West Bengal, but total food supplies were officially stated to be adequate. Preliminary indications are that the monsoon has again been favorable this year, and with the help of the large supplies of wheat that are continuing * Some estimates have put the increase considerably higher than this, and one recent report even claimed that foodgrain production in 1956/57 was an all- time record, exceeding the 68.8 million tons achieved in 1953/54. However, the statistics of the Ministry of Agriculture do not support this claim. to arrive from the U.S.A. under the PL 480 agreement, it should be possible to keep food prices reasonably stable over the next six months. The other main article of general consumption in India is cloth. Home demand for cloth was depressed towards the end of 1956 by the imposition of heavy additional excise duties, which appear to have resulted in widespread destocking by merchants in India; and the fall in home demand made possible a notable increase in exports. It must be expected that buying will be resumed now that it is recognized that the additional duties have come to stay, and there may be renewed pressure on supplies, with unfavorable repercussions on exports. However, there are no signs of this yet, and latest trend of textile prices is slightly downwards. In July the ILinister of Commerce and Industry stressed the need for higher production of consumer goods, and the Second Plan targets for a number of indlustries were revised upwards, including bicycles, radio receivers, sewing machines and sugar. It was decided not to license additional capacity in the mill sector of the cotton textile industry, since licenses already issued for the import of new spindles and automatic looms had not been fully utilized. The Budget for the financial year beginning last April, which was introduced by the Finance Minister on Haky 15, provided for large increases in taxation. These are expected to bring in an additional Rs.850-900 million (about $180 million) during the current fiscal year and over Rs.l,000 million ($210 million) in a full year. M4ore than two-thirds of the extra revenue is to come from indirect taxes, particularly higher excise duties on sugar, tobacco, matches, motor spirit, steel and cement and a tax on railway passenger fares. Important changes were proposed in the structure of direct taxation, including - (a) the introduction of an annual tax on wealth, to which is eventually to be added an expenditure tax (the rates of the wealth tax will be -Very low, ranging from one-half per cent to 1-l/2%, itb yield- is estimated at Rs. 150 million in a full year, and it will apply to companies as well as individuals; the expenditure tax is experimental and will apply to personal expenditures over Rs. 3C4,000 a year, with allowances for dependants); (b) a considerable reduction in the marginal rates of income tax and surtax on individual incomes (for earned income the present maximum rate of 92% is to be reduced to 77%); (c) at the bottom of the scale a lowerirg of the exemption limits for individual income tax; (d) various changes in corporation tax which are in part designed to encourage the ploughing back of profits through a check on dividend distribution (special concessions are to be given to foreign companies to encourage foreign investment). Some of the budget measures, including the proposed wealth and expenditure taxes, have been modified in the course of parliamentary discussion, but the main outlines of the Finance MSinister's proposals apparently still stand. The Finance Bill was passed by Parliament on August 28. - 4 - As a result of the additional taxation a prospective revenue deficit will be converted into a sizeable surplus, and the estimated overall deficit to be financed through an expansion of Treasury Bills will be reduced from Rs. 3.65 billion to about Rs. 2.75 billion. The comparable budget estimate for last year was Rs. 3.56 billion, but the actual deficit turned out to be substantially less because expenditure fell well short of estimates.* There is reason to expect a similar shortfall this year. At the time of the Budget the Bank rate in India was raised from 3-1/2% to 4%, and rates of interest on small savings were increased on average by about 1/2%. Subsequently, at the end of June, the Governor of the Reserve Bank addressed a letter to the commercial banks calling for more cautious lending policies. He has recently called the banks to task for failing to keep a tight enough control over their advances and has par- ticularly stressed the need to restrict advances against foodgrains and other agricultural commodities so as to discourage speculative boarding. Early in August the Central Government issued two loans totalling Rs. 1 billion, and these were over-subscribed. A substantial proportion of the subscriptions, however, was in the form of conversions of previous loans, while a further part was no doubt put up by the banks. These are apparently the only loans contemplated by the Center this year, but a special effort is being made to obtain more small savings. The State Governments (except Bombay) have agreed not to issue any new loans this year on the understanding that they will be allotted a larger share of the proceeds from the sale of National Savings Certificates. In the last analysis India's ability to arrest the decline in her foreign exchange reserves will depend on the concrete steps taken to restrain demand at home. The sharp deterioration in the balance of pay- ments during the past eighteen months reflects the heavy claims made on resources by rising expenditures on investment, consumption and defence, and these claims must be moderated if financial stability is to be restored. Important steps have been taken in this direction. The question is: do they go far enough? Import restrictions have been tightened, taxation has been substantially increased and credit and monetary restraints have been used to curb internal demand. At the same time the Finance Ilinister has announced that the Second Five-Year Plan is being rephased, and that no new projects will be approved outside the core of the Plan unless special arrangements can be made to cover the foreign exchange costs. But it is not only through their direct foreign exchange cost that development expenditures impact on the balance of payments. The continued excess of total government expenditure over revenue has greatly stimulated consumption as a whole, and a more com- prehensive program of retrenchment will probably be needed if deficit fin- ancing is to be reduced to a level compatible with internal and external financial stability. * On the Government's definition of the overall deficit, which is the increase in Treasury Bills outstanding adjusted for changes in the cash balances of the Central Government, the revised figure for 1956/57 is Rs. 2.16 billion. But if the definition is extended to embrace the oper- ations of the State Governments and to include all methods of financing which produce an expansion of money supply, the figure is Rs. 3.08 billion. The major nart of the difference between these two figures represents the absorption of government securities by the banking system. INDIA (All figures in Rs. billion except where otherwise stated) 1952 1953 1954 1955 1956 1956 1957 I I II IV I II '0PUIATION (mnllion) 367 372 377 383 389 UATIONAL OUTPUT Net National Product at factor cost - at current prices 2 98.2 104.9 96.2 96.5 - at 1948-49 prices / 94.6 100.3 102.8 104.2 Agricultural production (1950D100) g/ 97 102 114 116 114 Industrial production (1951-100) 104 106 113 122 133 130 142 144 136 140 ?RICES Wholesale prices (1938/39-100) 387 394 388 355 4014 380 393 416 425 423 431 Consumer prices (1949-100) 103 106 101 96 105 98 104 108 110 107 MURRENCY AND BANKING 3/ Money supply with public 16.8 17.1 18.3 20.5 21.8 21.8 21.9 21.1 21.8 22.2 23.4 Treasury Bills outstanding 3.35 3.46 3.50 4.60 6.67 5.95 6.43 5.79 6.67 8.36 9.42 Central Govt. deposits with Reserve Bank 1.75 1.10 O.55 0.54 0.57 0.67 0.64 0.71 0-57 0.54 0.52 Scheduled Bank credit to private sector iJ4.68 4.61 5.38 6.36 7.88 7.61 7.57 7.514 7.88 9.00 9.18 'ENTRAL GOVERNMENT BUDGET 3 Revenue receipts 4.35 4.16 4. 56 4.98 5.62 Current expenditures 3.96 4.07 4.23 4.57 5.24 Capital outlay and advances to States 1.68 1.97 4.J4 4.81 6.97 )VERSEAS TRADE AND PAYMLNTS Imports (c.i.f.) 8.07 5.70 6.17 6.48 8.15 2.03 1.92 2.10 2.10 2.36 Exports (f.o.b.) 6.17 5.32 5.63 6.o8 6.o4 1.64 1.32 1.42 1.66 1.62 Terms of trade (1953-100) / 105 100 108 107 107 110 102 107 113 ' Official foreign exchange reserves / 8.24 8.41 8.49 8.53 6. L8 8.64 8.15 7.33 6.148 6:4hS 5:82f/ Note: Many of the figures far recent periods are provisional estimates subject to revision. I Financial year beginning April 1 Crop year ending June 30 of year shown Figures relate to end of period indicated From November 1954 includes "foreign bills discounted" A rise indicates a favorable movement After including dollars purchased from the I.M.F. to the value of Rs. 0,61 billion in the first quarter of 1957 and Rs. 0.3L billion in the second quarter -5- - 6 - PAKISTAN Recent developments have tended to aggravate the three dominant problems of the economy: (a) a growing food deficit owing to stationary agricul- tural production, population growth and inflated personal incomes; (b) large scale deficit financing by the Government; and (c) heavy dependence on for- eign aid to balance foreign transactions. During the year ending 1iarch 31, 1957, food supply and demand have at best been in balance, although crops were slightly above the average of the preceding 9 years and food imports reached a record level of 10% of supplies. Right after the beginning of the current fiscal year complaints about food shortages rose again because the arrival of imports programmed for the current year was delayed and existing stocks insignificant. Imports of foodgrains during 1957/58 are expected to be 1.4 million tons against 1.3 million tons last year. Unless crops will be better than last year, this increase in imports appears insufficient because the annual rise in demand owing to popu- lation growth is at least 200,000 tons. The Government hopes that the in- crease in imports over last year will be covered by foreign aid and that only the same quantity as last year will be imported from Pakistan's own resources, i.e. 40LOO000 tons. Monetary expansion continues because of Government spending in excess of resources. During 1956/57 the budget deficit after foreign aid was about 20% of ordinary revenues or Rs. 400 million against Rs. 330 million during the preceding year. The rise was caused by marked increases in expenditure for development, defense and food import subsidies which outpaced growth in revenue. The monetary effect of the budget deficit was aggravated by an expansion in bank credit to the private sector caused by further growth of the industrial sector. In order to check inflationary pressures the Govern- ment permitted a reduction in foreign exchange reserves; during 1956/57 these reserves were drawn down from Rs. 1,350 million to Rs. 1,250 million or 45% of total annual foreign exchange payments. On balance, money supply increased by 7% during 1956/57, bringing the total rise during the two years since the beginning of the Five Year Plan to 27%. Indications are that the consequent rise in internal prices is accelerating. It is estimated that the cost of living has been enhanced by at least 10% during the 12 months ending June 1957. The balance of payments position has recently become more precarious. Firstly, the terms of trade have continued to deteriorate and dropped from 91 to 75 (1953 = 100) during the 6 months following September 1956 as com- pared with a peak of 115 during the year preceding the Plan. C.i.f. prices for major import commodities have risen sharply owing in part to the Suez crisis, while export prices for cotton, wool, and tea have dropped to an extent which has more than offset growth in total eiport volume. Secondly, contrary to expectations, it became necessary in 1957/58 to finance food imports out of the country's own foreign exchange resources in a volume equivalent to 10% of all foreign exchange earnings. Thirdly, development imports have risen by over one-third in line with the acceleration of devel- opment spending. However, receipts from foreign aid and loans have continued at a high level and will do so for at least 2 years owing to large amounts in the pipeline. - 7 - During the current year the budget deficit will be over 50% greater than last year. No increase in defense expenditure is anticipated, but development spending is gaining momentum and larger food imports will necessitate greater subsidies. The inflationary effects of Government deficit financing will be augmented by a further expansion in bank credit to the private sector. However, in order to keep the monetary expansion roughly within last year's limits, the Government has recently imposed some restrictions on bank credits to the private sector and also plans to draw more heavily on foreign exchange reserves than last year: reserves are to be reduced by at least Rs. 250 million to one-third of likely foreign exchange payments during the current year. Looking beyond the current year, the danger of inflation looms large. Unless drastic action is taken the budget deficit will continue to grow. Miore- over, it will not be prudent to reduce foreign exchange reserves still further. Under these circumstances monetary expansion in the next year may reach a level of 15% per year if present fiscal policies are continued. The Government is becoming increasingly aware of the dangers inherent in the current situation and has recently appointed a Special Commission to work out proposals aiming at a reduction in the budget deficit. PAKISTAN 1956/57 1957/58 Fiscal years beginning April 1: 1953/54 1954/55 195556 1956/57 1957/58 I II III IV I POPULATION (million) 80.4 81.6 82.8 84.1 i/ NATIONAL INOOME AT OOFSTANT PRICES 2/ (billion Rs.) 19.4 19.9 19.5 19.9 i/ of which agriculture 11.7 11.6 11.2 1.h 4/ of which large and medium scale industries 0.7 0.9 1.1 1.h I of which terms of trade - 0.5 - 0.3 - o.6 - 0.6 i FOD GRAIN PRODUCTION million tons 114.2 12.7 11.7 13.3 i/ MONEY SUPPLY / 3,697 3,916 4,701 5,039 11,591 4,459 4,926 5,039 CONSOLIDATED CENTRAL AND PROVINCIAL BUDGETS h,/ (million %e.) 1. Revenue 2,183 1,971 1,989 2,139 2,299 2. Expenditure 2 679 2,742 2 811 3,817 h 593 a) Development (595) (820) 6875) (1,201) (1,613) b) Defense (799) (800) (821) (1,003) (1,002) c) Other (1,295) (1,122) (1,215) (1 613) (1,978) ((of which Food Subsidies)) ((-103)) (d212)) ((512)) 3. Deficit 496 771 822 1,678 2,294 Financed by a) Foreign aid and loans 20 185 214 654 675 b) Capital receipts 146 105 108 175 274 c) Funded debt, net 265 351 5 1,088 1,183 d) Unfurned debt 50 67 82 103 125 e) Cash balances 15 63 68 - 342 37 f) Devaluation windfall - - 345 - - INTERYAL PUBLIC DEBT g 3,490 3,910 4,000 5,190 GOVERNHENT CASH BAlANCES ,/ 338 275 207 549 332 L63 440 5h9 67h CHANGE IN U.S. COUNTERPART FUNDS )+283( +110 +293 (HANCS IN PUBLIC DEBT HNE OUTSDE BANKS ) ( + 63 +155 NET EFFECT OF BUDGET ON WINEY SUPPLY i/ +200 +330 +o00 +105 - 70 +199 +166 TIME DEPOSITS AT SCHEDULED BANKS I/ 359 497 534 560 564 554 5h5 560 519 BANK CREDIT ID IHE PRIVATE SSCTMRS 816 1,o48 1,168 1,223 936 988 1,256 1,223 1,133 FORE;1GN EXCHANGE REERVES 2/ %/ 1,037 976 1,348 1,257 1,395 1,271 1,262 1,257 1,201 (720) (675) TEMS OF TRADE. 1953 - 100 95 115 94 83i/ 87 91 86 75 ./ BALANCE OF PAYMENTS J/ W (in million Rs.) 1. Current Account a ) Reept ij Raw Cotton 480 550 410 119 51 110 134 ii) Raw Jute 850 750 780 161 127 266 222 iii) Other 570 750 800 224 162 221 193 iv) Total 1,900 2,050 1,990 TOT m b) Pats ijFo5dpui-chased with own resources - - 240 ii) Other nondevelopment 1,550 1,500 1,660 iii) Total nondevelopment 1,550 1,500 1,900 iv) Development 700 600 820 v) Total 2,250 2,100 2,720 623 651 8L5 595 c) Balance on Current Account -350 -50 -730 -119 -311 -2L85 -16 2. Capital Account - net .289 +422 +639 +166 +187 1239 +41 Y/ End of year, million Rs. i 1956/57 based on revised estisates; 1957/S5 data are budget estinstes 2/ Approaimte 5/ Actuals before August 1, 1955 adjusted upward by 41I for purpose of comparison with post devaluation period. Post devaluation rupees; in parenthesis pre- Jy Excludirg food importso urder aid devaluation rupees 8 - 9 - IRAN Recent developments have pointed up Iran's basic problem of gearing the tempo of development to the growth in oil revenue without inflationary financing of complementary local currency needs. During the second year of Irants Seven-Year Plan ending March 20, 1957, economic developments were characterized by a marked acceleration of non-development spending by the Government and development spending by the Plan Organization. The Government succeeded in raising roughly two-thirds of the increase in expenditures from additional ordinary revenues, rapidly increasing oil revenues, US aid and a first disburse- ment on the IBRD loan, but the substantial residual deficit of Rls. 2.8 billion had to be financed by inflationary means. Its impact on the money supply was augmented by a surplus in foreign transactions because imports could not keep pace with oil revenue; a largeportion of the inflated inter- nal demand was for goods and services which could not be readily imported. The monetary effects of a simultaneous increase in bank credit to the pri- vate sector were, however, more than offset by a rise in time deposits and savings of the private sector. While information available on recent growth in national output is fragmentary, there is no doubt that it has fallen far short of the increase in money supply. To be sure, oil pro- duction has exceeded previous estimates and reached an annual rate of 30 million metric tons during the summer of 1957 as against 26 million metric tons during the preceding year, but agricultural produaction drop- ped during 1956/57 because of serious floods. As a result of all these factors the cost of living has risen by at least 15% during 1956/57. During the current year, the Plan Organization which ran a cash deficit of Rls. 1.9 billion in 1956/57, should be able to keep its cash transactions in balance with the help of the IBRD loan. On the other hand, the discontinuation of US budget assistance which covered Rls. 1.7 billion of a total budget deficit of Rls. 2.7 billion will make the Government's ordinary budget deficit much larger. On balance, the total deficit will be substantial and roughly the same as last year. Its infla- tionary effects are likely to be increased again by a balance of payments surplus. Total oil revenue is expected to reach $200-205 million (against a minimum guaranteed by the Consortium of $188 million); total foreign exchange receipts may thus rise to $455 million against 4373 million dur- ing the preceding year or by 25%. With this increase, imports are unlikely to keep pace. In the aggregate, money supply may well increase bylll-17% as compared with 17% during 1956/57. Looking beyond the current year the tempo of inflation is likely to accelerate unless drastic action is taken. First of all, the way has been paved for large scale Government borrowing outside the budget and the Development Plan. In order to provide finance for the local _ 10 - currency cost of development projects outside the Seven-Year Plan, particulErly in Khuzistan, most of Iran's gold and foreign exchange reserves have recently been revalued. In May 1957 the legislature passed a bill establishing the par value of the rial at 75.75 rials to the dollar, against an old par value of 32.35 rials to the dollar. It affected neither foreign assets held by the Banking Department of Bank Melli nor current commercial transactions because these had been valued at the rate of Rls. 75.75 to the dollar ever since the beginning of 1956/57. However, the revaluation released the equivalent of roughly $90 million gold and foreign assets held in the Issue Department (as 40%, note cover under the 1954 Note Reserve Act) and transferred this amount to a special fund in the Banking Department. A ccording to the Revaluation Law this fund, after conversion into rials by sales of foreign exchange to the Issue Department, can be drawn upon only for local currency loans for productive purposes outside the Seven- Year Plan. However, the Issue Department cannot use the gold and foreign exchange repurchased from the Banking Department fcr any note issue in addition to the rial equivalent of the repurchase, Consequently, the Revaluation Act will permit a maximum note issue of only Rls. 6.8 billion. At the present rqtio of currency in circulation to demand deposits this may facilitate an ultimate expansion in money supply by Rls. 15 billion, or by over half its present size. At present the Government seems determined to monetize the special revaluation fund with great caution; but when the development of Khuzistan gets under way after some delay, the monetization may proceed quickly. At the same time, a further acceleration of public local expenditure and a rise in money circulation is unlikely to be fully offset by an expansion of imports. Moreover, the problem of balancing the budget will probably be further complicated by the fact that its share in oil revenues will drop below the current level of $39 million or 15% of local budget revenue. According to existing legislation, the budget's share during 1958/59 will be composed of (a) 80% of eil revenue in excess of $188 million; (b) the amount by which the 20%o NIOC share in total oil revenues exceeds NIOC expenditures and (c) provided that a special commission (consisting of the Miinister of Finance, one other minister appointed by the Cabinet, and the general manager of the P.O.) so decides, to 5% of $188 million, thus reducing the share of the Plan Organization from 80% to 75% of $188 million. As to (a) total net oil revenue (after compensation to B.P.C.) is projected at $221 million, and the budget should thus receive about $26 million. As to (b), the share of NIOC in oil revenue from the Consortium is to be reduced from 28% to 20%, and NIOC expenditures show an upward trend; it thus appears unlikely that transactions of the NIOC will leave a surplus for the budget. As to (c) it seems probable that the above commission will indeed decide to make the additional $9 million available for the budget. In summary, total oil revenue for the budget during 1958/59 should be about $35 mil- lion as compared with $39 million during the current year. After 1958/59 the budget is to receive (apart from NIOC surpluses which are unlikely to materialize) only 5% of total oil revenue, subject, however, to the - 11 - approval of the above commission, (the NIOC receiving 20% and the Plan Organization 75% or 80%). Consequently, unless existing legislation is changed, oil revenue for the budget will not exceed $15 million for a number of years, even if net oil revenues from the Consortiiu rise from presently `190-195 million to almost $300 million by 1961/62 as expected by the Government. However, the prospects for oil revenue have been improved by the enactment in July 1957 of new legislation which establishes the framework for agreements between Iran and foreign oil companies for the exploitation of oil reserves outside the areas assigned to the exist.. ing Consortium. Recently the first agreement of this kind was reached with ENI, the Italian govermnent oil monopoly. Briefly, the agreement provides that the NIOC will be considered to hold 50% of the shares of any new joint ventures with foreign oil firms, although the latter will furnish vitually all the capital, the machinery, and the technicians for exploration and development work. With the royalty being maintained at 50% of the profits, this arrangement results in a split of profits bet- ween Iran and foreign capital on a 75:25 basis. The new joint company, called STRIP, has obtained drilling concessions in three different areas of the country: one offshore near the estuary of the Shatt al Arab, one in the northeast of Khuzestan, and one along the coast of Baluchistan. IRAN 1956/57 1957/58 Year endirg March 20: 1954/55 1955/56 1956/57 1957/58 I II III IV POPULATION (rough estimate in milliomr) n.a. n.a. 19 NATIONAL INCOME (rough estisate in mlldion $) n.a. n.a. 1,600 AGRICULTURAL PRDDUCTION (1000 metric tons) Wheat ?,341 2,300 Rice 443 350 Cotton (Lint) 60 60 Sugar beets 521 n.a. 8.9 CRUDE OIL PRODUCTION (million metric tors) 3.5 15.8 27.8 5.4 6.9 7.0 6.9 7.5 WHOLESALE PRICES (1953 - 100) (End of period) 120 121 126 124 121 125 126 COST OF LIVINI (1953 - 100) (Eni of per'lod) 122 126 14o 132 129 13L 140 140 PFiVATE DEHAND DEPOSITS (billion rials) (Eri of period) 12.5 13.8 17.2 15.1 16.0 16.3 17.2 MONEY SUPPLY (billion ials) (End of period) 23.4 24.6 28.9 25.2 26.2 27.0 28.9 28.7 (April) GENERAL GOVERNMENT BUDGET (billion rials ) (a) Ordinary Revenues 10.0 10.6 13.9 18.5 3/ (b) Oil Revenues - 0.7 2.8 3.4 (c) Expenditures 12.3 14.8 19.3 21.9 (d) Deficit before aid - 2.3 - 3 -; ° (e) U.S. aid 2.3 3.6 1.7 4.0 0 (f) Balance after aid 0 + 0.1 - 0.9 PLAN ORGANIZATION (million 8) (a) Expenditures n.a. 39.5 i/ 108.4 165.- j 20.8 17.9 I2.3 27.4 (b) Oil Revenues n.a.. 25.7 / 72.6 10io. 1/ 16.5 9.2 ?9.6 18.8 (c) Deficit before other receipts n.a. -13.8 j/ - 35.8 56.0 1/ - 4.3 - 8.7 -12.7 - 8.6 (d) Other receipts n.a. n.a. + 10.3 (e) Balance after other receipts: (1) million $ n.a. 6.o _ 25.5 (2) billion rials n.a. + 0.5 - 1.9 NET BALANCE OF GOVEHNMENT OPERATIOIB (billion rials) n.a. + o.6 - 2.8 + 0.6 0 - 1.0 - 2.4 INTERNAL PUBLIC DEBT (billion rials) (end of period) 26.2 26.4 28.7 26.1 26.7 27.2 28.7 GOVERNMENT CASH BALANCES (billion rials ) (end af period) 3.1 3.9 3.4 4.2 4.8 3.9 3.14 BANK CREDIT T0 PRIVATE SECTOR (billion rials)(end of period) 7.6 9.2 10.1 10.0 10.0 9.9 10.1 TIME DEPOSITS AND SAVINGS CF PRIVATE SECTOR (billion rials) (end of period) 3.9 4.5 5.6 4.7 5.0 5.3 5.6 FOREIGN ASSETS (end of period) Gold (million 8) 138 138 138 138 138 138 138 138 Foreign exchange (midlion $) 73 72 81 80 81 92 81 Ilt TOTAL (a) million $ 211 210 219 218 219 230 219 192 (b) billion rials at 75.75 rials per 8 15.8 15.8 16.5 16.6 16.5 17.4 16.5 13.8 FOREIGN TRADE (million $) (a) Exports other than oil, including invisibles 120.4 93.1 105.8 (b) Imports except foregin oil Co. including invisibles 164.4 168,6 229.6 (c) Trade balance -44.O 7T -13 BALANCE ON CAPITAL ACCOUNT OTIER THAN OIL 2/ (million $) +18.3 -57.9 - 42.6 FOREIGN EXCHANGE RECEIVED FIM OIL INDUSTRY (million 8) (a) Oil revenues 18.5 79.8 133.7 (b) Purchases of rials by Consortium & NIOC oil exports 14.2 52.6 47.0 Total 32.7 132.4k 10.7 / Budget estimates i/ September 21, 1955 to March 20, 1956 only 2/ Accounts for imports on Government account (indcudirg Government invisibles and foreign loans and aid other than U.S. military hardware) - 13 - IPAQ Despite the heavy decline in oil production vwhich resulted from the demolition of IPC pipeline installations in Syria in early November 1956, Iraq's economic position remains basically sound. Total oil production in 1956 reached a level of 29.3 million metric tons (31.7 million tons in 1955); its contribution to the total national income of ID 292 million;i amounted to 27% as compared to 24% for agriculture, 17% for services, and 12% for manufacturing industries. Had normal conditions prevailed throughout 1956, production would have been approximately 14% higher. During the first seven months of 1957, output was 50%, below the figure for the same period of 1956. Full pipeline operation will not be restored before the spring of next year; the present throughput of the pipeline, that started operating again in kiarch 1957 at 40% capacity, is about 55% of the pre-Suez figure of some 25 million metric tons. From early November 1956 through August 1957, the Iraqi Gover ent has incurred a total loss in direct oil revenues of some ID 34 million 1, calculated according to the level of revenue that vwas reached in the third quarter of 1956. Total direct oil income of the Government in the current year is expected not to exceed ID 50 million, whereas it might have increased close to ID 90 million without the severe curtailment of exports resulting from the Suez crisis. Total government outlays have not yet been significantly affected by the loss of revenues. Actual expenditures of the Development Board amounted to just over ID 45 million in 1956/57 as compared to respectively ID 33 million and ID 20 million in the tvwo preceding years, and the revised program estimates for 1957/58 call for a direct expenditure of ID 65 million. Ordinary budget expenditure also increased from an annual level of ID 50 million in the years 1953/56 to almost ID 75 million in 1956/57, when an exceptionally large deficit of almost ID 13 million was incurred. The Development Board has been able to increase its expenditures because spending in the past has fallen considerably short of the budget targets and revenues, so that substantial cash balances viere built up. At the end of 1956 the Board's cash reserves amounted to ID 68 million. VWhile this reserve vwhen added to current o-il income of which the Board receives 70% appeared quite ample to finance anticipated expenditures for some time to come, the Board has as a precautionary measure temporarily shelved some projects not yet put out to tender. Its 1957-58 budget provides for expenditures of ID 65 million - ID 20 million more than last year's actual outlays - and anticipates a deficit of ID 30 million to be defrayed by drawing on reserves. The original 6-year development program (1955-56 to 1960-61) had envisaged total expenditures of ID 101.5 million by this year, but it would have been impossible in any event to reach this target. The ordinary budget, which receives 30% of all revenues, has meanwhile been assisted through an undertaking of the Iraq Petroleum Company to make an interest-free loan up to ID 25 million. This loan may be drawn to the extent that the budget's share of oil revienues falls below ID 6 million per quarter. In the current year the government is expected to draw ID 10 million of the loan. Mounting government expenditures, together with a recovery of agricultural production from a low 1955 level and an expansion of industrial production in certain sectors,'have created boom conditions in Iraq's economy. Money supply, including time deposits,rose by 16% in 1956; wholesale prices as well as cost of living increased 75, continuing upward in the first months of 1957. Imports increased by 10%, but exports, other than oil, showed a decline mainly due to larger internal consumption. The gold and foreign exchange reserves of the Central Bank increased from 4294 million at the end of 1955 to $,353 million at the end of 1956, but dropped to <`286 million in the first half of 1957. - 15 - FPAQ 1953 1954 1955 1956 1957 POPULKTICIX (million) - - 4.8 - _ I.ATPIOU'AL I1":ci. (ID million) - - - 292.4 - P-ODUCTION i 000 tons) Crude Oil 28;217 29,812 31,744 29,251 - VJheat 762 1,160 453 776 - Barley 1,111 1,239 757 1,016 - Rice 163 i80 83 ill - Dates 371 365 421 300 _ PRICES (1953 = 100) W,.holesale: Index 100 96 97 104 109 'May Cost of Living: Index 100 98 101 108 111 June MiONEY QUPPLY Currency in circulation (ID million) - 40.5 43.1 49.0 - Savings & Demand deposits - 22.1 24.4 28.5 - Time deposits - 2.9 3.9 5.4 - Money supply, including time deposits - 65.5 71.4 82.9 - OdDINA,RY BUDGET (ID million) Receiptsl/ !,7.7 52.2 63.4 61.72/ 68.4 est Expenditure - 50.1 - 53.8 - 50.9 - 74.53/-7(.7 est Balance - 2.T - 1.6 12.5 - 12.6 - 2.3 est DEVELOPI.KLT BUDGET (ID million) Receiots2J 35.28 40.73 60.75 50.77 35.632/ Expenditure - 12.26 - 20.87 - 33.42 - 45.00 -65Ooo3/ Loans disbursed - 6.09 - 0.85 - 5.56 - 5.30 12.002/ Surplus 16.93 19.01 21.77 0.47 -41.37 BALPNCE OF PAYi'iENTS (ID million) Oil revenue (net) 55.43 66.74 94.38 79.79 - Exports 23.04 20.68 16.18 14.94 - Imports - 56.91 - 68.70 - 90.88 -104.70 - Other (net) 0.23 4.63 0.83 20.44 - Balance = increase in foreign assets & gold 21.79 23.35 20.51 10.47 - TOThL FOEIG11 ASSETS (mD million) 83.2 102.7 122.7 133.8 - 1/ 30% of receipts from oil royalties are credited to the ordinary budget. 2/ 70% of receipts from oil royalties are credited to the development budget. 3/ Revised estimate. - 16 - SYRA The favorable development of some iriportant elements in Syria's economy during the past year has, on balance, not been matched by a corresponding improvement in the country's general economic and financial position. Agricultural production - contributing, on the average, some 45d to national income - reached a record level in 1956, after the bad crops of the preceding year; and crop prospects for the present year again are exceedingly good. Industrial production, probably profiting from the higher economic activity in the agriculture sector, also showed sorne increase. Consequently, exports and imports rose in comparison to 1955 although the changes remained comparatively small; both in 1955 and 1956 export earnings accounted for about 73% of import requirements, leaving a balance of trade deficit of LS 57 millionl/. PresLumably the export level would have been higher in 1956 had not some difficulties in marketing been encountered (apparently not yet completely overcome), partly as a result of political factors (e.g. the embargo on exports to France), partly due to a temporary interruption in trade during the Suez crisis. Soviet bloc countries took an increasing share of total exports: 1.7% in 1955; 9.4% in 1956 and 19.8% in the first quarter of 1957. Increased oil transit revenues formed a further favorable factor during 1956; Government receipts from oil companies rose from d,3 million in 1955 to '-21.9 million in 1956 (inclusive of a retroactive adjustment of 58.2 million). Nevertheless, the balance of payment on current account over 1956 still showed a slight deficit that iwas, however, more thian counter-balanced by official capital movements which included the use of the remaining '6 million out of a 10 million interest free loan tlmt Syria had received from Saudi Arabia in 1955. Altogether, over 1956, Syria's foreign assets in- creased by some $11 million to $79 million. Developments in puolic finance have been unfavorable. Largely as a result of a substantial increase in defense expenditure Syria's total fiscal operations led to a large deficit of about LS 65 million in 1956. This deficit, w-hich wTas partly financed by borrowing from the Central Bank, was primarily responsible for a sharp increase in the country's money supply (185% during 1956), which in turn must be one of the important reasons for the substantial rise in cost of living (13% between December 1955 and Hay 1957). There are indications that the Syrian Government, aware of the grave inflationary dangers, is trying to follow a more conservative financial policy for the current year. The estimates for 'the ordinary budget of 1957 showT some decline in expenditare as compared to the actual gures for 1956, mainly resulting from a reduction of defense expenditures by some LS 21 million. Besides, during the first five months of 1957, disbursements for development projects have been deliberately curbed to an amount of some LS 5 million per month, as against an average monthly level of about 1S 9 million in 1956. lMoney supply has not substantially increased since the I/ 61 = LS 3.58 - 17 - end of last year, but this development may be mainly due to a considerable loss of foreign assets Thich dropped from 579 million in December 1956 to I56 million in April 1957. Development expenditures are being allocated from a senarate extraordinary budget for economic development which was approved by the Syrian Parliament in August 1955 and provides for expenditures of LS 636 million during a 6-year period. Through the end of 1956 LS 137 million had been actually disbursed under this budget, mainly for the Ghab Valley project and the extension of facilities at Latakia Port. Under the recent agreement with Soviet Russia, Syria will be provided with necessary equipment and technical assistance for its further economic development. The credit extended by Russia is reported to be some LS 400 million and repayable on a long-term basis ateinterest rate of 2,%. Technical details of the agreement, which has not yet been officially signed, are being worked out between the two partners. It is still too early to judge its probable effects on Syria's financial position in geneial and on the progress of its economic development in particular. The Russian aid reportedly would cover a broad field of projects includ- ing the building of the Yussef Pasha Dam, road and railway construction, industrialization and the completion of projects already undernay, such as the Ghab Valley drainage scheme. In August 1956 SyriaIs Central Bank officiallyr started operations, taking over from the (private) Banque de Syrie et du Liban which, until then, had exercised the functions normally assigned to a central bank. The new system enables the monetary authorities to exert far better control over the supply of money and credit. SY1U.A 1953 1954 1955 1956 1957 1956 19<7 T I1: TTT TV I IT Prm7IIATTON (Settled: million) 3.9 WFT7itcrJst !Ls million) 1,6001/ 1,650 - - - - - - - _ _ FN3DUfl'I~ ON '/ '.'heat ('00( metric tons) 870 96N 438 1,051 1. 701/ - - - 9 l rle.y( " " " ) 472 635 137 h62 6201/ Cotton( "" " ) 7 80 84 91 - - - - - Cement( f " ) - 249 246 326 - - - - - Flectricity(K'rT million) - 129 147 164 - - - - '.'HTOLESALE PEUICRS (1953=100) 100 89 96 103 1022/ job 104 99 103 106 97 Raw material 100 102 90 92 922/ 94 95 92 85 90 96 COST OF ItJIirNG 100 92 91 105 1132/ 102 100 104 115 115 111 MT4NTEY AND C.\T) O c TT(Ms million) - 445 421 519 527 - - - - - - Motes and Coins (net: end oF period) - 335 316 410 4173/ _ - _ _ _ _ Private cuirrent deposits (net: end of period) - 100 105 109 1103/ 0R7TN. .hY "-0 T (TS million) Receints - 245 280 3314 3651/ vxcpenditu re - -221 -249 -370 -3651/ Balance - -i 31 - 3 nTFWTVL0oPrT ThR'!DTTTr.rS - - - 1374/ 255/ .TANC2 OF ? P."AY:TTS (in IS., million) A. Goods and Serrices Irnports (fob) - _202.6 -209.14 -214.7 - - - - - - - Exports (ciif includinpg monetary r-old) - 167.5 152.1 158.1 - Trade Balance - - 35.1 - 57.3 - 56.6 - Receints from Oil Cos. - 11.2 18.3 37.4 - _ _ _ _ _ _ Other services - _ 7.2 4.7 6.3 - B. Donations and Private Cap- ital movements - 10.3 28.1 2.9 - - - - - C. Net errors and omissions - 8.5 10.9 9.5 - - - - - D. Total (A through C) - - 12.3 4.7 -0.5 OFFICIAL H0LTTNrS OF ('OLD ANTD FORSIGM ASSRTS 'Held by the Central Bacnk (LS million; free rate; end of period) 151 161 163 228 1783/ 182 172 179 228 205 - Held by Commercial Bank (IS million; free rate; end of period) 55 57 76 60 393/ 2 55 51 60 50 - TOTAL FOREPIGN ASSETS 206 218 239 288 217 224 227 230 288 25c; - 1/ Estimated 2/ 5 months '/ April 1957 1/ Actual disbursements for August 1955 through December 1956 _/ Actual, disbursements in first five months of 1957 - 17a - - la _ JORDAN Jordan's domestic economy has developed favorably since the end of 1955. Agricultural production was at a h-igh level in 1956 due to favorable clirmatic conditions, and prospects for 1957 are also good. Industrial production, though small in itself, continued to expand, the principal increases occurring in phosphates and cement. As a result exports - to which agricultural products, including olive oi/,, contributed 62'?" and phosphates 16% - increased from JD3.6 million1! to JD5.2 million. Imports decreased from JD25 million to JD22 million. The deficit in the balance of trade consequently dropped bv some JD5 million to a figure of JD16.7 million, which figare is reduced to JD12.6 million when net receipts from services and private donations are taken into account. Official donations and loans, amounting to JD16.75 million in 1956 of which over JD10 million from the U.K. and about JD5.5 million from UNRIA , more than bridged this gap. As a result, total foreigi exchange assets increased by over JDh mil- lion during 1956. Foreign aid also contributed more than 50% to government income, thus allowing for a balanced budget for 1956/57 at a level of expenditure of just over JD20 million. For the current year prospects remain good. TJith the abrogation of the Jordan-U.K. Treaty of Alliance the influx into Jordan of U.K. funds stopped (apart from a recent small development loan of Ll.13 million payable in tiw-o equal instalments during this year and the next). Of the promised aid of JD12.5 rmillion, which Egypt, Syria and Saudi Arabia undertook to provide with a view to replacing the British subsidy, only JD5 million has been received from Saudi Arabia. On the other hand, total U.S. com- mitments now amount to `30 million (JD10.7 million). As a result both the foreign exchange position and the bud-et position for 1957/58 seem strong even after allowing for some decline in UlTF:kA aid. Expenditures of the Development Board, i-hich will now coordinate all development projects, are exoected to increase from.^ JD1.5 million in 1956/57 to JD1.8 million in 1957/58. The major part of these funds w.ill be used in ecual parts for the improvement of facilities in the Aqaba Port and for the completion of the desert road to Aqaba. Other projects include the establishment of a petroleum refinery, the expansion of agricultural credit, further investment in phosphate production and the first stage of construc- tion of the East Ghor Canal with a view to using Yarmouk wTater for irrigation on the East Bank of the Jordan River. Although the money supply increased 16% in 1956 and continmed to expand during the first part of 1957 there was no evidence of any substan- tial inflationary pressure in the country. 1/JD1 = $2,80 JORDAN 1953 1954 1955 1956 1957 POPULATION (thousands) - 1,402 1,4.47 1,480 1,500 NATIONAL INCUfIE (JD million) - Ll.2 _ _ P1DDUCTION ( 000 tons) Wheat 99 233 79 242 20( es-t. Barley 43 104 25 96 70 " Olives 49 61 12 72 24 t PRICE INDEX June Dec June Dec June Dec June Dec March Wholesale 100 99 88 92 97 100 94 105 101 _ Retail 100 107 101 106 105 117 101 112 118 _ MONEY AtD CREDIT (JD million) Net currency in circulation 8.52 10.61 11.11 14.52 14.53 Mar Private current deposits 4.79 5.44 6.01 5.41 6.25 Total money supply 13.31 16-05 17.12 19.93 20.78 BUDGET (JD million) Receipts Domestic revenue - 7.69 7.95 9.71 8.04 Foreign grants - 8.78 8.98 8.76 19.64 Total - 16.47 16.93 18.L7 27.6T Expenditures - 16.56 17.61 20.16 26.53 Balance 1/ - .09 - .68 -1.69 1.15 BAlANCE OF PAYMENTS 5JD million) A. Trade deficit - -15.54 -21.69 -16.72 - B. Surplus on Services - 2.66 4.39 2.43 _ C. Private donations - 1.65 1.66 1.66 - D. Miscellaneous capital_/ - 1.14 0.70 0.33 _ E. Net errors and omissions - 0.16 0.57 - 0.31 _ F. Total (A through F) - - 9.93 -14.37 -12.61 _ G. Official donations and loans _ 13.92 16.72 16.75 - H. Official short-term assets (increase -) - - 3.99 -2.35 - 4.14 - FOREIGN ASSETS (JD million) Banks' foreign assets - 5.86 8.55 9.14 8.60 Mar Note issue cover - 12.00 12.93 16.78 16.08 " Total - 17.86 2 5.92 124.6" J/ Exclusive of drawings on U.K. loans g/ Release of balances in Israel and, for 1956, inflow of private capital (JDO.25 million) - 19 - LEBANON Recent econormic developments in Lebanon have not been particuarly noteworthy. The outbreak of hostilities in the liddle East in November 1956 hardly interfered with the steady upward trend of the economy in this, relatively prosperous, little country. There were some withdrawals of foreign capital; the banks tightened their credit policies; transit trade and tourism slackened; and speculation led to some sharp price increases, that were almost immediately reversed. At the beginning of 1957 the situation was virtually normal again; even the capital influx, mainly from the oil-rich Arab countries, had been resumed. Foreign trade continmed to expand during 1956. Exports of Citras - the most important export crop of the Lebanon - were some 15% higher than in 1955. The deficit on the balance of trade was again larger than the previous year, but apparently so were the receipts out of invisibles and amUgrant remittances (recent balance of payments figures are not avail- able). Dfficial gold and foreign exchange reserves remained about constant over 1956 but increased considerably over the first half of 1957. The general government budget showed again a substantial s-urplus (iL 40 mil- lionl/). Expenditures on development projects (usually financed out of the Reserve Fund to which the surpluses from the ordinary budget are allocated) are increasing. In the twelve years 1944-55 total capital expenditures of this kind amounted to LL 114 million, whereas in the year 1956 LL 21 mil- lion was spent for this purpose. Further economic development will undoubtedly be fostered by the comparatively large amount of American hid which the country is now receiving. U.S. commitments to the Lebanon under the Eisenhower Doctrine for the current year amount to $10 million. The unused balance of some $3 to 4 million of ICA funds carried over from 1956 (apart from about $2.5 million for technical assistance) further augment Lebanon's dollar balances available for development outlays. The American economic aid will help finance a variety of projects, including highway construction, public housing, rural water supply, extension of Beirut's International Airport and further electrification; some of these projects are already underway. American military aid to the Lebanon in 1957 reportedly amounts to $4.7 million. Recently a new 5 year devrelopment program has been prepared providing for a total expenditure of LL 680 million ($230 million). It is estimated that of this total just over 50% can be met out of surpluses generated by the ordinary budget; the balance will mainly come from oil revenues (estimated &t Lt l1 miflninU over the period in question), US aid and the IBRD Litani loan. Execution of the Litani project is about to start. The first contract (for the construction of the Djezzine Tunnel) has been awarded. It is reported that the President of the Lebanese Republic Twill officially in- augurate the construction work toward the end of September. ~1/51 ipprox1matel7yLL 3.20 (free rate) - 20 - LEBANON 1951 19524 1953 1954 1955 1956 1957 1956 1957 _ _ _ _ I II III IV- I IT POPJLATION (thousands) 1,304 1,338 1,417 1,4h7 1,483 - - - - _ _ _ _ NATIONAL INCaME (LL million) 1,071 1,090 1,255 1,380 1,110 1,165 _ _ _ _ _ _ PRODUCTTON Wheat (1000 m. tons) - - 55 76 86 88 961/ - - _ _ _ Cement(100 m. tons) - - 314 326 453 - - - - _ _ _ _ Electricity (KWH) - - 164 181 219 - - - - - - - - PIECES (1953 - 100) Wh=olesale 122 111 100 98 93 98 1002 99 98 98 97 101 - Cost of living 107 107 100 95 97 102 1092/ 102 103 102 102 107 - MONEY SUPPLY (LL million) 465 506 533 608 715 778 - 705 763 778 778 - - Currency (end of period) 212 205 209 246 271 338 3322/ 247 286 305 338 332 - Demand deposits (end of period) 253 301 324 362 444 440 - 458 477 473 440 - - TIME DEPOSITS (LL million; end of period) 6 12 19 27 39 42 - 39 39 43 42 - - ORDINARY AND AUTONOMOUJS BUDGET (LL million)4/ Receipts - 161 163 157 178 193 l705/ - - - - - - Expenditure - -127 -139 -111 -132 -153 -1705/ - - - - - - Balance - 34 24 46 46 40 _ _ _ _ _ BALANCE OF TRADE 6/ Imports -426 -440 -414 -559 -708 -763 - -176 -198 -187 -203 - _ Exports 90 78 86 92 108 130 - 35 26 30 29 - _ Balance -336 -362 -326 -467 -600 -633 - -141 -172 -157 -174 - - GOLD AND FOREIGN EXCHANGE HOLDING (TJS. million) - - 55 76 86 88 917/ 86 87 86 8P 91 96 1/ July 1957 Z/ March 1957 3/ April 1957 I/ Actual results 7/ Estimrated Z/ IFS figures (adjusted for exchange rate understatement); figures exclude, however, important unrecorded export transactions. 7/ June 1957 -21 - - 22 - EGYPT The deterioration in Egypt's economic position that started in 1955 continued through 1956. The trade deficit rose from $34 million in 1954 to approximately $172 million in 1955 and $126 million in 1956. Foreign exchange and gold reserves declined in 1956 by $83 million to $588 million,l/ while foreign liabilities increased considerably partly because no use could be made of Egyptian assets that were blocked abroad as a result of t-he nationalization of the Suez Canal. Communist China, Soviet Russia, Czechoslovakia and Saudi Arabia supplied Egypt with material and financial aid, mainly against future cotton exports; and in September 1956, Egypt borrowed $15 mill-on from the IVF. The money supply increased substantially (11.5%), principally as a result of Government borrowing from the National Bank to cover the budget deficit. The cost of living showed a gradual upward trend, increasing by some 6% between the end of 1955 and April 1957. Wholesale prices rose 19% in the same period. Egypt's trade with the Soviet Bloc countries continued to increase. Exoorts to these countries rose from 14% of total exports in 1954 to 34% in 1956, and in the first 4 months of 1957 the total value of such exports was reported to have increased by more than 50% over the same period of last year. The first half year of 1957 showed an improvement in the balance of trade to a surplus of approximately $18 million as comoared to a deficit of about $30 million during the first half year of 1956. This development is mainly due to severe import restrictions; exports remained about constant. On April 24, 1957, the Suez Canal was reopened. On the basis of total canal dues paid in the first half of 1956, Egypt may be receiving from this source a gross foreign exchange revenue at an annual rate of about $100 million. Despite the fact that Egypt borrowed another $15 million from the IMF in February 1957, Egypt's total, officially-published foreign exchange and gold holdings continued to decline by some $30 million between January 1 and August 15, 1957, whereas foreign liabilities increased by some $62 mil- lion. Part of the explanation for the decline may be that, in MIy 1957, Egypt transferred ; 15 million 2/ ($42 million) from its old sterling balances to the Sudan with the approval of the U.K. Treasury, following the dissolution of the monetary union between Egypt and the Sudan and the introduction in April 1957 of a new Sudanese currency at the rate of 1/ The composition of foreign assets of all Banks in Egypt in I million as of Yarch 14, 1957, was as follows: Sterling No. 1 (blocked as a result of Suez nationalization) 26.1 Sterling No. 2 80.7 Gold 65.6 U.S. dollars 24.3 Other currencies 12.6 214.3 2/ WE 1 = $2.87. - 23 - 4E 1 = .Sd. 1 * A complete analysis of the recent developments in Egypt's foreign exchange reserves cannot now be given for lack of knowledge about factors such as payments for the import of arms and repayments on special credits received in 1956. There are reports that Egypt has lately been building up a substantial foreign exchange balance (some $25 million) in Switzerland, mainly in Swiss Francs and convertible sterling. This might indicate a certain shift in the composition of Egypt's foreign exchange holdings and may also offer some explanation for the continued increase of foreign liabilities referred to above. Although the ordinary budget for 1957-58 anticipates a surplus of $55 million, this would not be sufficient to cover the planned expenditure of the development budget of approximately $82 million. Further deficit financing at a time when the supply of goods may decline owing to import restrictions, might well increase inflationary pressures in the country. Money supply remained fairly constant as in the first half of 1957, but only because the effect of further government borrowing from the iNational Bank (the claims of the NBE on the Government increased by aE 17 million between December 1956 and July 1957) was largely counteracted by a further drop in net foreign exchange reserves. In the field of economic development Egypt is continuing its efforts to promote further industrialization of the country. A new 5-year industrial development plan has been prepared by the 1Ministry of Industry calling for a total exDenditure of approximately 1E 250 million. It is difficult to see how such a large outlay can be financed, particularly since the govern- ment is still committed at the same time to proceed with the High Dam at Aswan and will also soon face the need to start on an expansion of the capacity of the Suez Canal. The administrative set-up for economic planning has lately been reorganized. On January 13, 1957, two new bodies were created by presidential decision: (a) the Supreme Council for National Planning which is headed by the President of the Republic that will fix the economic and social targets of the country ano'. approve the development plans, and (b) the National Planning Coomission, headed by the Iiinister of Planning Affairs, that will prepare the development plans and look after their execution. January 1957 also saw the creation of the "Economic Organization", a kind of super-holding company of the State which will take over government participation in joint stock companies and sequeste-red French and British business properties. Public enterprises can also be put under its control. 1/ Altogether, Egypt usndertook to deposit to the credit of the Sudan up to 1 20 million; a further L 5 million was to be released to the Sudan on satisfactory completion of the collection of Egvptian money in the country, estimated at about IE 25 million. The remainder of Egypt's net debt to the Sudan, if any, will be settled through a special account of the Sudanese Government with the National Bank of Egypt, to be used for payment of Egyptian goods and services imported by the Sudan. - 24 - The Egyptianization law, also of January 1957, provides that banks and insurance companies may only carry on their business if their capital is wholly owned by Egyptians. To comply with this law a maximum delay of 5 years is allowed. The law also applies to commercial representations and agencies, but with some important exceptions (travel agencies, air companies, representatives of companies undertaking public works in Egypt, etc.) Egypt recently opened negotiations with the United Kingdom and France on the resumption of normal trade relations. The first discussion with the British held in Rome in early June showed a wide divergency of views between the two parties. Egypt insisted on immdiate release of its blocked sterling assets and in addition demanded a large sum (reportedly E 400 million) for "reparations". The United Kingdom on the other hand claimed a large amount (reported to be J. 140 million) as compensation for sequestered or nationalized British properties and funds. No immediate agreement was reached 1/ but on Egypt's invitation a small delegation of officials from the Bank of England and the Treasury visited Cairo in August for a preliminary reconnaissance of the sequestered assets. The French-Egyptian negotiations that started in tlhe second half of August in Geneva ha-e apparently encountered similar difficulties. It is expected that a French delegation may also shortly leave for Cairo for an on-the-spot investigation of the position of sequestered French properties which also represent a very substantial sum. .1/ However, some minor points, relating to the payment of pensions and of goods bought before July 1956, were settled. E G Y P T 1956 1957 1952 1953 1954 1955 1956 I II III IV I II POPULATION (millions) 21.5 22.0 22.5 22.9 23.4 AGRICULTURAL PRODUCTION Index (1946-50 - 100) '106 98 110 109 Cotton (million kantars) 9.9 7.1 7.8 7.4 7.2 Wheat (million ardebs) 7.3 10.3 11.5 9.7 10.3 INDUSTRIAL PRODUCTION Cotton yarn (1,000 tons) 56 59 64 73 75 20 17 18 20 Cement (1,000 tons) 947 1,096 1,237 1,371 1,351 357 357 351 286 Crude oil (1,000 tons) 2,383 2,268 1,972 2,019 1,828 473 504 583 268 COTTON EXPORTS (LE million) 126 116 113 107 99 36 31 13 20 36 33 BALANCE OF PAYNENTS Current Account (LE million) Exports, f.o.b. 149 138 144 139 142 46 45 23 28 46 48 Imports, c.i.f. -208 -16 -12 % -199 -186 -S2 -5 -SO -31 -43 -44 Trade balance -59 -29 -12 -60 -44 -6 -8 -27 -3 3 4 Suez Canal dues 27 29 31 32 29 9 9 8 3 - 5 Other -21 -8 -17 -14 Surplus(/) or deficit(-) -53 -8 2 -42 GOLD & FOREIGN ASSETS NATIONAL BANK (LE million) 249 241 247 217 189 200 190 191 189 190 183 GovERMMENT BUDGET (ZE million. Fiscal Accounte Estimates Revenue 194 198 206 228 238 Expenditures J2 208 200 228 238 Balance -39 -10 6 - Est. Capital expenditures _ - 25 41 779/ Overall deficit -39 -10 -19 -41 -77 GOVERNMENT DEBT (LE million) 173 173 174 219 321 271 296 321 310o' Debt to National Bank 57 55 46 87 150 97 105 126 150 164 162 GOVERNMENT DEPOSITS (LE million) National Bank 7.8 9.5 7.1 1.9 4.9 9.7 10.3 14.0 4.9 8.8 5 3 Other Banks 8.7 8.8 9.6 9.8 11.8 9.0 7.8 9.9 11.8 10.4 10.-_ 16.5 18.3 16.7 11.7 16.7 18.7 18.1 23.9 16.7 19.2 MONEY SUPPLY (I.E million) Currency circulation, net 206 189 187 185 227 176 195 227 228-/ Private deposits 201 210 231 249 259 241 243 259 32L5/ - 407 399 418 434 486 417 438 486 483 PRICES (1953 - 100) Wholesale 105 100 97 99 110 102 112 109 115 121 19J' Cost of living 107 100 96 96 98 96 97 98 100 101 102 / Cotton 139 100 117 115 125 110 129 141 145 153 147 1/ Fiscal year ending June 30. 2/ Including expenditures of LE 23 million for services to be carried out by the Permanent Services Council. I/ End of February. 4/ End of Yay. I/ End of January. 6/ April only. a28 SUDAN (Note: Since Sudan is a new member of the Bank, this number of Quarterly Review contains a brief description of the country) Description of the Economy The Sudan covers an immense plateau of 970,000 square miles in the northeast corner of Africa. It has a total population of 10,200,000 (1956 census). The White Nile flowTs through the country from. south to north along a course of 2,,140 miles and is joined by two main tributaries, the Elue Nile and the Atbara. 1\orth of Khartaam cultivation depends rainly on the 1tile ^waters; for the rest of the country, rainfall usually allows light cultivation or grazing. The 11ile is of the greatest importance to Sudan. Apart from serving as a transportation link between the north and the south, its waters are indispensable to agriculture and thus to the life of the Sudan. Both the old established riparian cultivation and the irrigated fields of the Gezira (between the 'Thite and Blue Yiles), as well as any- further develop- ment of irrigation to feed and improve the standard of living of an expanding population depend on the NTile waters. The Sudan is an agricultural and pastoral country. It has essentially a one-crop economy, with cotton and its products accounting for 60-80% of export earnings. Other crops such as millet (dura), sesame seeds, and groundnuts, as well as gum arabic, are cultivated both for domestic con- sumption and export. Industrial development is extremely limited, and consists mainly of the processing of agricultural products. There is, as yet, no cheap power, and no known mineral deposits of great importance. The transportation system is highly inadequate; the resulting high cost of hauling agricultural products over great distances is a limiting factor to development. Recent Developments SLdan's cotton crop in 1956/57i its first vear after incependence, is expected to be the highest ever recorded. Cotton production is estimated at 113,000 tons from an area of 765,000 acres, compared lith 92,000 tons from 598,000 acres in the previous year. This is an increase of 23< in produc- tion, and a 28% increase in acreage. Sudan's external financial position is strong. In 1956 it had an export surplus of LE 24 million, and a balance of payments surplus of LE 18 million on current accoant, both the largest since 1951. As a result, Sudan's foreign exchange position improved substantially; its foreign exchange holcings rose by L 16 million to T 4il mi ion. An independent currency was instituted in April 1957, with Sudanese pounds replacing at par an estimated 25 million Egyptian pounds which were circulating in Sudan. At the end of ,-, 1957, Egyptian currency notes - 26 - - 27 - withdravm from circulation totaled TE 14 million. A Currency Act provides that half of the cover of Sudanese pounds shall be in sterling and the other half in Sudan Treasury bills. The Parliament has recently authorized the Government to issue Treasury bills up to -S 15 million for the note cover. A Sudan Currency Board has been set up pending eventual establish- ment of a central bank. A financial agreement wias concluded between Sudan and Fgrpt in April 1957 concerning the redemption o' the Egyptian currency. Under this agree- ment Ejypt w-?ill pay Sudan up to ; 20 million in sterling fromn Egypt's sterling balances held in U.K. for "gyptian currency iTithdranJm from Sudan.I' If Egypt's net debt to Sudan exceeds L 20 million, the balance Till be credited to Sudan in Sudanese pounds in a special account nith the National Bank of Egypt at 2% interest, and Sudan will use this balance at a rate not exceeding LS 2 million annually to payr for Egyptian goods and services purchased by Sudan, including annual iimports of 40,000 tons of sugar and transfer of funds on account of Egyptian capital invested in Sudan. The internal financial situation is stable. The Central Government budget estimates for the current fiscal year 1957/58 foresee a surplus of LS 5 million, compared lath an estimated surplus of LS 7 million in 1956/57. Aside from this ordinary government budget there is a development budget, a budget for the Sudan Railways, and budgets for other autonomous Governmnent agencies. Development budget outlays, financed mainly from ordinary government surpluses, have been spent in accordance with two development programs. The first 5-year (1946-51) program provided for projects which have been almost completed at a cost of LE 14.6 million. The second 5-year (1951-56) program,costing an estimated LS 48 million, has not yet been fully carried out although some LS 42 million had been spent by mid-1957. A new 5-year program is under discussion, which may call for total expenditure of LS 120 million, wsitlh .S 80 million to be financed byT borrowing. The major projects of this program include: (a) the i4anagil extension wThich will bring about additional 800,000 acres under irrigation; (b) construction of the Roseires Dam on the Blue Nile; (c) the establishment of an agri- cultural credit Bank; (d) a higlhway development program; and (e) further development of the southern p-rovinces. Contracts in an amount of 10 mil- lion have already been aiirarded for a sugar scheme in the south and for the first phase of the lManagil Extension. Sudan has no internal debt, and its external debt is small, amounting to T58.6 million at the end of 1956. Of this sum, Th.2 million was the outstanding amount of an Egyptian loan, which is to be entirely repaid in 1957. 1/ Hitherto L15 inillion have been released to the Sudan, with the approval of the U.K. Treasury. STTDAN 1951 1952 19U3 195h 1955 1956 1957 POPUTATT ON (million) 10. 2 r,OTTON Acreage (1,000 acres) 539 571 h16 652 685 598 76c Production (1,000 tons) 90 54 80 83 84 92 113 Exports (LE million) 1/ 46 29 27 22 30 42 3TDGET (TE -ir,1llion) 2/ Results Estimates Revenue --Tb 37 46 29 29 37 -36 42 Expenditures 24 3/ 22 25 27 32 3Ls 35 BEld ct surplus - 3/ 24 4 2 2 7 EALMNCT ofi PATt*V"\IT3, Cu.rrent account (LE million) .!xports, f.o.b. 4/ 8,0 47 45 46 56 72 Imports, c.i.f. El -42 -60 -07 -)19 -f1~ -hs Trade balance 3-' - 2 - 3 5 Invisibles P orivate donations (Net) - -1 -5 -5 - 9 - 6 Surplus or deficit(-) YF37 -14 :7T T 48 7'Tt4nUIS5ALB FjC-,3(l953-lo0o) 124 131 100 135 131 1365/ COST 07 L 77TNG ITNDEX (1950=100T7 126 118 129 129 135 1/ 1951-52: FAS values; 1953-56: FOB values. Approximately 7OB values are 10' hipher than PAS values. 2/ Ordinary budget of' Central Government only; year ending June 30. 3/ 18 months (January 1, 1950 - June 30, 1951) 4/ Based on the exchange record, plus trade with EEgypt taken from trade returns, plus estimated exports of live camels to Egypt, since the exchange record does not cover trade with Egypt. 5/ Average of first three quarters only. 6/ December only. -20 ETHI OPIA Despite a slight decline in export earnings in 1956 the economic situation has remained stable. During 1956, the balance of payments on current account showed a small deficit of Eth.$ h million, mihich was more than offset by capital receipts; foreign exchange holdings of the State Bank rose by Eth.4, 5 million. Prospects for 1957 are good, with an unusually large coffee crop expected to permit record coffee exports of 50-60,000 tons. In the first half of 1957, the main export season, foreign exchange holdings of the State Bank were up by Eth.48 25.4 million, compared with an increase of only Eth.$ 11.5 million for the same period in 1956. The internal financial position is stable. 'Thile the budget estimates for the current fiscal year 1956/57 foresee a deficit of Eth."' 13 million mainly because of a proposed repayment to the U.S. of the Lend-Lease silver loan of Eth.'t 12 million, the Government's position with the State Bank improved considerably during the first half of 1957; its net balance with the State Bank increased by Eth."; 13 million, as against a rise of only Eth.*; 2 million for the same period in 1956. Mainly because of the export season, money supply in the first half of 1957 rose by Eth.4N 18 million or 11%. This compares with a rise by Eth.5 13 million or 8% during the first half of 1956. Prices in general remained stable. - 29 - E T H I O P I A 1951 1952 1953 1954 1955 1956 1956 1957 POPULATION About 15 million (no census has ever been taken) BUDGET (Eth.$ millions)/ Results Estimates Revenue 77 84 108 132 115 115 Expenditures 98 84 85 106 129 130 Surplus or deficit (-) -21 0 23 26 -14 -15 GOVT. DEPOSITS AT STATE BANK (Eth.$ millions) 22 31 65 81 66 93 93 94 96 93 98 106 GOVT. DEBT (Eth.$ millions) Internal 36 52 70 68 63 98 89 98 97 98 External 20 30 24 26 31 31 -31 31 56 82 94 94 94 129 120 129 MONET SUPPLY (Eth.$ millions) Currency circulation 87 93 110 118 128 134 142 138 132 134 160 149 Demand Deposits 1 27 31 27 30 3J 30 33 37 35 40 38 Total 106 120 141 145 158 169 172 171 169 200 187 PRIVATE CREDIT (Eth.$ millions) State Bank 3/ 14 17 22 21 18 28 28 42 42 Development Bank 1 4 5 7 7 8 8 15 21 27 28 25 36 3 PRICES (Indexes of wholesale prices, Addis Ababa, 1951 - lCO) Coffee 100 108 97 133 89 111 107 109 106 100 General exports 100 85 77 91 73 83 80 83 79 77 General imports 100 94 79 76 76 75 72 74 78 78 BALANCE CF PAYMENTS current account -(Eth.$ millions) Exports, f.o.b. 125 115 178 167 168 157 92 Imports, f.o.b. -7 -99 -120 -140 -148 137 -77 Trade balance 38 16 58 27 20 20 15 Invisibles -26 -20 -26 _-19 -27 -24 -12 Surplus or deficit (-) 12 -4 32 8 -7 -4 3 COFFEE EXPORS. f.o.b. 63 50 100 99 91 80 (Eth.S millions) GOLD, sILVER, & FCREIGN EXCHANGE HOLDINGs OF STATE BANK (Eth.$ millions) 63 72 113 139 151 156 163 163 160 156 189 181 (Lb.$ millions equivalent) (25) (29) (45) (56) (60) (62) (65) (65) (64) (62) (75) (72) / Fiscal year ending September 10. The private credit from the state Bank includes loans and advances, bills purchased, custcers liabilities on letters of credit, and accounts receivable. - 30 - August 31, 1957