825.131/12–2150: Airgram

The Secretary of State to the Embassy in Chile

confidential

A–142. Chile’s proposals to the IMF for modification of its exchange rate system were similar in general features to descriptions in Emb despatches 575 Dec 18 and 581 Dec. 21.1

The IMF received the proposals on Dec 23 in the form of a rather generally phrased telegram from the Central Bank of Chile which added that additional information could be supplied by Sr. German Picó who was about to travel to Washington.

On Dec 28 the Fund Executive Board met to give preliminary consideration to the Chilean proposals and to discuss them with Sr. Picó who had just arrived. The statements made and data presented raised further questions and the meeting was adjourned in order to permit the Fund Staff to have more detailed discussions with the Chilean representative.

The Staff on the basis of these discussions became increasingly skeptical of the probable effectiveness of the Chilean proposals. It concluded that approval should not be recommended and suggested that the Fund reserve its position regarding the system until there had been an opportunity to observe its actual operation.

The Executive Board met again on Dec 30 and the Director representing Chile conceded that the proposal was not all that could have been hoped and that it was not likely to be effective without a program to deal with inflation. He introduced the idea that the Fund reserve its position or take no decision.

[Page 801]

At this point the alternatives were either acceptance of the formula presented by the Director representing Chile or outright disapproval. The US Executive Director stated that while he agreed with the analysis made by the Fund Staff and shared its conclusion that the proposals should not be approved nevetheless he thought that under favorable circumstances use of a free market for part of the commodity trade and for invisibles would be useful and could provide a workable interim arrangement to deal with short-run balance-of-payments pressures arising either externally or internally through inflation. Then he introduced the following draft decision which was subsequently adopted:

“The Fund has studied the proposals of Chile which are intended principally to shift a portion of the minor exports and imports which have less effect on the cost of living to the free market, leaving otherwise substantially unchanged the existing multiple rate structure. The Fund notes with satisfaction the statement of the Chilean Government that its ultimate objective is to attain a simplification of the exchange system and a sound par value for the Chilean peso. But, in the Fund’s view, the proposed adjustment is not adequate to deal with these objectives. Furthermore, there are a number of uncertainties as to how the system will operate in practice. In any case, even a more thorough adjustment would be ineffective unless coupled with a comprehensive program designed to deal with the problem of inflation and to restore internal financial stability. In view of these considerations, the Fund takes no decision respecting the proposed changes and will remain in consultation with the Chilean Government on ways in which the exchange system can be adapted more effectively to Chile’s needs and on the adoption of a comprehensive program designed to deal with the problem of inflation.”

Acheson
  1. Neither printed.