CONFIDENTIAL
24.
Afghanistan
Pakistan has reported a sharp escalation in cross-border air and artillery attacks by Afghanistan resulting in more than 60 deaths between 13-22 August. The Karmal regime denies these attacks. Recourse by Pakistan to the Security Council is unlikely at present. In response to Pakistan's request to NATO and EC Ambassadors, Lady Young made a statement on
23 August condemning Afghan violations and expressing support for Pakistan. The Afghan attacks were probably timed to precede the resumption on 26 August of UN sponsored indirect' talks on Afghanistan at Geneva, involving the Pakistan and Afghan Foreign Ministers, and UN Special Representative Cordovez.
There is little prospect of these talks proving successful as the Soviet Union refuses to commit itself to a timetable for troop withdrawals. Mr Shultz wrote to the Secretary of State on 31 July to oppose the lifting of sanctions against Ariana (Afghan Airlines). A reply is being submitted separately.
WORLD ECONOMIC DEVELOPMENTS
25. US Economy
Latest indicators suggest that US recovery is continuing but at a slower pace. There was rapid growth in the first half of the year and for the second quarter was 7.6% on an annual basis. Industrial production rose however by just under 1% in July, both employment and retail sales fell back, and there was a second consecutive decline in the index of leading indicators. Three month interest rates have been steady in recent weeks at around 10.5%. The recent mid year budget review shows a deficit for this year of $174bn (4.8% of GNP) falling to $139bn (2.6% of GNP) by 1989.
There was
26. Oil
The spot price of oil fell in July due to excess supply and a lull in the Gulf War. Production was reduced following the mid July OPEC meeting and/a difficult period at the end of that month when BNOC come under pressure to reduce its prices. Spot prices have firmed but remain $1-2 per barrel below term prices.
OTHER ISSUES
27. Cyprus: The UN Secretary General's Initiative
Perez de Cuellar put new ideas for progress towards a settlement to representatives of both communities in Vienna on 6/7 August. He asked for reactions by 10 September and hopes to hold further
/talks,
CONFIDENTIAL
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