823.5151/120: Telegram

The Ambassador in Peru (Norweb) to the Secretary of State

64. Department’s telegram No. 56, May 31, 7 p.m.

The credit contemplated by the Minister of Finance would be for the purpose of supplying exchange heretofore obtained from cotton exports. This credit would only help meet the situation until about the end of the year. On the basis of 1938 exports cotton furnished about 25% of foreign exchange.
The Government took steps to secure additional foreign exchange through an agreement on May 22 with gold producers whereby the [Page 1138] Central Reserve Bank will purchase the annual production of gold bars amounting to about 23,000,000 soles. Payment will be made in soles and the producers will be supplied their needs in foreign exchange. Gold so acquired will remain in the hands of the bank available for foreign exchange.
The Government no doubt could obtain the cooperation of commercial banks in Peru for a loan in soles against the cotton but this plan would notably weaken the liquid position of the banks and would not supply the foreign exchange needed.
A third alternative would be the floating of an internal loan but this would not be looked upon with favor and also would fail to supply needed foreign exchange.
The Minister of Finance admits that a remedy is available through curtailment of imports which may be brought about by allowing the sol to seek its own level. However, he states that his objective is to maintain the present level of commercial and industrial activity and that so long as this is possible no exchange control measures would be adopted. On the other hand it is difficult to reconcile these statements with actual developments namely: The gold purchase referred to in paragraph 2 and the Minister’s own statement that within the next few days 80 to 90 per cent of all foreign exchange coming into Peru is to be turned over to the Central Reserve Bank at the current rate of exchange for allocation.
Since my conversation with the Minister of Finance I understand through a reliable source that the Minister now is thinking in terms of a 2 to 3 million dollars credit instead of the original 5 million. Also I believe that if the Finance Minister could see how Peru’s participation in the Inter-American Bank would result in some [solution?] of the exchange problem he would endeavor to find funds to meet Peru’s installment.
On basis of the estimate mentioned in paragraph 1 cotton supplied about 60 million soles in foreign exchange. If the credit required during the next half year were based upon these figures the amount would approximate the 5 million dollars originally mentioned. However, if a credit is to be granted I should recommend that an initial amount of from 1 to 2 million be made available on a trial basis with further credits dependent upon the successful operation of any plan developed.
The Peruvian Government has not furnished any additional information regarding the long term cooperative program but has promised to do so. This is a matter apparently requiring long and careful study. Furthermore the question of credit and the long term credit are in the minds of the Peruvians two district [distinct?] projects. The former is regarded as of immediate urgency. The latter [Page 1139] has not yet progressed beyond the nebulous stage outlined in the memorandum of the Minister of Finance transmitted with my despatch No. 109.8
From statements of the Minister of Finance it is almost certain that the Peruvian Government has no intention to make even a temporary arrangement in the near future with respect to the dollar debt and Beltran has been given no instructions in the matter. The Minister declared today that not even the sum of 3½ million soles included in the current budget for use in connection with the dollar debt could be devoted to that purpose during the present emergency and added that there is no need to give serious thought to the dollar debt until Peru is able to increase its exports to the United States by an appreciable amount. In spite of these statements, if credits are to be contingent on a debt arrangement I would be willing to request the Minister to reconsider his position. However, an offer made when Peru was more prosperous was rejected by the bondholders as inadequate. Any offer that might be made now would be no better.

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A full report is contained in despatch No. 1308 going forward by airmail Monday.
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