The Minister in El Salvador ( Frazer ) to the Secretary of State

No. 190

Sir: I have the honor to acknowledge receipt of the Department’s instruction No. 47, of May 27, 1938 (RA: GAD:GRS: 5/23/38), requesting information on the financial situation of the Government of El Salvador, and its strictly confidential instruction No. 48, also of May 27, 19384 (without file number), transmitting copies of correspondence relating to the default of the Salvadoran Government under the terms of the Loan Contract of June 24, 1922.

There is enclosed a memorandum, with eight annexes,4 kindly prepared for this Legation by Mr. W. W. Renwick, the representative in El Salvador of the Fiscal Agent of the foreign loan. Mr. Renwick was formerly with the National City Bank of New York but has been in El Salvador in his present capacity for the past sixteen years. He is an American citizen of the highest integrity and of the best type.

The following conclusions may be drawn from the schedules annexed to the enclosed memorandum:

Import Revenues.

Revenue from import duties for the first quarter of 1938 amounted to Ȼ2,997,394, which is the largest collected from this source during any corresponding quarter since 1929. The greatest amount collected in import duties during any corresponding quarter in the past 14 years was in 1929, when these amounted only to Ȼ466,439 more than in the first quarter of the current year. Collections of import duties declined in April and May, 1938, to Ȼ708,513 and Ȼ740,846, respectively. This decline was, in part, seasonal, but it was not so great, and will not be so great in June, in the opinion of the customs authorities, as to prevent total collections of import duties for the first semester of 1938 being at least normal, or somewhat above normal.

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Export Duties.

Export duties of course declined in the first quarter of 1938, as compared to the corresponding quarter of most previous years, as shown below:

1935 1936 1937 1938
January Ȼ349,269 112,438 411,698 385,159
February 571,754 180,851 671,020 423,738
March  641,611 230,277 744,583 336,380
Totals 1,562,634 523,566 1,827,301 1,145,277

On November 2, 1937, the export duty on coffee (practically the only article on which export duty is assessed) was reduced by two thirds, or from U. S. $2.57 to 85.67 cents per 100 kilos (220 pounds) gross, and this more than accounts for the decrease below average of the export collections in the first quarter of the current year. The preceding bumper crop was the largest in the country’s history, which accounts for the very large import duties collected in the first quarter of 1937. Export duties collected in April and May, 1938, were Ȼ143,159 and Ȼ149,173, respectively.

Central Reserve Bank.

The financial position of the Central Reserve Bank (which may be taken as the financial position of the Government itself) is shown in annexed schedule “H”, by months from September 30, 1934, to April 30, 1938, as well as on May 15, 1938, the latest date for which the information is available.

The last named figures show that the bank’s gold reserve amounted to Ȼ13,172,000 against a note circulation of Ȼ14,246,000, and that the Government’s sight deposits (i. e., its general deposit plus the deposits of Official Institutions) totalled Ȼ5,548,000. The latter sum exceeds twenty five percent of the country’s total annual budget; which means that these deposits could enable the Government to function, if necessary, without collecting another penny of revenue for over three months.

Government Income.

The principal sources of Government income, and the amounts received from each during the past two calendar years and for the first quarter of 1938,are shown below (in thousands of Colones):

Customs Liquors Consular Fees Communications Miscellaneous Total
1936 8,665 1,685 1,214 874 4,753 17,191
1937 13,021 1,836 1,011 1,007 4,325 21,210

The Government’s total income during the two preceding years, 1934 and 1935, was Ȼ19,573,124 and Ȼ20,211,738, respectively.

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That the Government is living well within its means is shown by the fact that its surplus of receipts over expenditures was Ȼ550,975 at the end of the last fiscal year (June 30, 1937). There was a small budget deficit on operations in fiscal 1936, but this was far more than met from the large balance on hand of Ȼ3,326,527 at the end of fiscal 1935.

Foreign Debt.

Both the Minister of Finance of this Government (Doctor Samayoa) and the Auditor General of the Republic (Mr. Augustin Alfaro Moran) have stated within the past few days that no payment on the foreign debt will be made on June 30, next, and Mr. Alfaro expressed the private opinion that the prospects of making any payment even at the end of 1938 are not at present favorable.

Experience has unfortunately shown, according to some old residents here, that when any payment in a series is defaulted in a Latin American country it is most unlikely that it will be made up later.

Last week the Government directed that the special reserve fund set aside to meet payments of the foreign debt be transferred to the Government’s general fund at the Central Reserve Bank. This special reserve fund amounted, when transferred to the general fund, to approximately Ȼ1,180,000.

Other Government Debts.

Mr. Alfaro and other well informed sources believe that, unless world coffee prices considerably improve, the reduced coffee export tax now in effect (of about 85 cents U. S. currency per 100 kilos instead of $2.57) will be continued next year. This will mean a reduction of some Ȼ2,000,000 in the Government’s revenue from this source, as compared to what it would receive were the rate of $2.57 still in effect. (It may here be noted that interest and sinking fund charges on the foreign debt practically equal the above figure, being Ȼ2,125,000 per annum).

The internal public debt of El Salvador has been reduced to the nominal sum of approximately Ȼ2,000 ($800), while the only internal account of substantial importance now (May 31, 1938) owed by the Government is the sum of United States currency $256,666 due the Bank of London & South America. Payments on the latter are being made regularly.

Political Rumors.

It is strongly rumored, and the rumor believed by many well informed persons, that General Martínez has now practically made up his mind to succeed himself in office as President for another term of four years beginning March 1, 1939. It was understood a month [Page 565] ago, as reported in my No. 146, of May 6,6 that there was a strong probability that General Martinez would decide to relinquish his office at the end of his term, and that General A. I. Menéndez, the present Minister of War, would succeed to the Presidency. It is said that this change might well have eventuated but for the fact that General Menéndez positively declines to accept the office; but perhaps the last statement should not be accepted without reservation.

A possible connection between the presidential succession and the foreign debt is that if General Martinez were leaving office he would probably be careful to keep payments up to date, but that as he is now counting on a further four years, he wants all the money possible to carry forward the program of road building and social betterment in which it is believed that he is unquestionably most sincerely and genuinely interested. No doubt, also, he desires a financial reserve to draw upon, in the event of emergencies arising from his determination to succeed himself.

Be that as it may, the undersigned does not feel that either the future prospects or the actual financial position of the country justifies its defaulting in its foreign obligations at the moment, and is disappointed that the President has taken the stand in regard to it that he evidently has taken. Last November, when coffee, the sole important product and mainstay of this country, declined some $3 per 100 pounds in a few weeks, pessimistic forebodings for the future seemed both natural and justified, and it was not felt at that time that the Government could be very severely criticized for temporarily suspending service on its foreign debt. However, as things turned out, general business conditions were affected far less than was apprehended and the financial position of the Government remained exceedingly strong (of course a little stronger than it would have been had it not defaulted on its debt payments). No reason, therefore, is seen now to justify the continued suspension of these payments. After all, the interest and sinking fund payments due for the first half of this calendar year are only $467,500, or Ȼ1,168,750, a sum which the Government could certainly very well meet if it strongly desired to do so; for in a number of past years it has met larger debt payments than this at times when its financial position was much less strong than it is today.

Representations to Government.

In view particularly of the third paragraph of the Department’s instructions No. 47, it was felt of course that no representations whatever could be made by me to the Government in regard to its present default. It did seem, however, that something might be said by indirection, [Page 566] and opportunity was taken at a luncheon given by the President a few days ago to remark to him, while we were talking alone, that I had observed with much interest the exceptionally strong financial position of his Government, and that I intended to report fully upon it to Washington, knowing how gratified our Government would be to know the actual situation. I further pointed that it must be very gratifying to him to be able to spend approximately a million dollars on an aerial map of El Salvador (for which bids are already in) as well as other large sums for public purposes. The President agreed but, beyond looking rather thoughtful for a time, made no definite rejoinder.

Appointment of a Collector General.

It is noted that in its letter of May 17, 19387 to the Secretary of State, the Manufacturers Trust Company, as Fiscal Agent, invokes Article XVI of the Loan Contract of June 24, 1922, in applying for the creation of the Customs Administration and the appointment of a Collector General. In this connection, Mr. W. W. Renwick, the local representative of the Fiscal Agent, points out that the Salvadoran Government could, if it were disposed—and it might well be disposed—upset such an arrangement in the same manner in which it closed his office last November and appointed instead a Special Delegate of the Salvadoran Treasury to collect customs revenue for application to the foreign debt.

Any further information desired by the Department in regard to the subject of this report will gladly be supplied with the greatest possible despatch.

Respectfully yours,

Robert Frazer
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