Foreign Relations of the United States, 1955–1957, American Republics: Multilateral; Mexico; Caribbean, Volume VI

106. Memorandum From Albert Post of the Office of Inter-American Regional Economic Affairs to the Director of the Office (Turkel)¹

Washington, October 17, 1957.

SUBJECT

• Financial Status of Latin American Countries

Argentina: Drew $75 million, one-half of quota, from IMF in April 1957. Gold and dollar reserves continue to decline, falling to less than $200 million, lowest level since the end of the war with losses of $50 million in 1955, $132 million in 1956, and $97 million for the first seven months of 1957. It appears that further losses of reserves are inevitable. In Paris Club currencies there was a $6.6 million negative balance at the end of July. Cost of living and monetary expansion continues at more than 20% per annum. Understood that feelers have been put to the IMF for further drawings. Clear that unless Government is willing to enforce austerity program involving credit restrictions, balance in fiscal accounts, effective exchange policy, and more favorable attitude to foreign investments that international payments crisis may be expected within a year or so.

Bolivia: A stabilization agreement with the IMF, ICA, and U.S. Treasury (supported by $7.5, $10, and $7.5 million respectively) was initiated November 1956 to cope with a runaway inflation. In addition, ICA gave $10 million of grant aid and about $7 million PL 480 aid. For FY 1958 ICA grant aid of $17–19 million is envisaged. To-date Bolivia has drawn $8 million from the $25 million stabilization fund. International reserves are $3 million. Progress in achieving financial stability has been rather good, with price level below pre-stabilization levels and boliviano at 8,700 (September 19) compared with 12,000 (December 1956) per dollar. Basic problem appears to be whether stabilization can be maintained at same time some expansion is necessary to increase capacity to earn foreign exchange. This requires limited investment in strategic sectors in order not to upset financial stability and requires additional external aid. Possibilities of import substitution should also be explored. U.S. programs aimed at general “improvements” which do not keep these fundamental factors in mind will most probably fail to solve basic problem.

Brazil: U.S. dollar reserves were $174 million in September 1956 and fell minus $20 million on September 2, 1957. Unpledged gold holdings are $118.7 million but are subject to IBRD waiver before they can be negotiated. Continued inflation for a number of years (at about 20% per annum) and decreased coffee exports in price and volume have now (October 4) forced Brazil to obtain a $37.5 million drawing from the IMF (to 50% of quota). Fiscal deficit for 1957 of about $30 billion ($400 million) is expected and credit expansion based on deficit financing continues unabated. Both IBRD and Eximbank have refused to consider additional development loans until inflation is contained. Petroleum imports alone require over $275 million annually of $1.2 million total import bill. Forecasts for earnings from coffee exports (60–70% of total) are generally pessimistic. It is expected that international reserves will be so low by spring of 1958 that additional external finances will be sought.

Chile: In 1955 with technical advice of a Klein & Saks Mission a full stabilization program was begun, supported by a stabilization fund of $75 million ($35 million IMF, $25 million U.S. Treasury, and $15 million New York private banks). A fair degree of success was achieved in stabilization efforts in 1956 (cost-of-living increased by 56% compared with 75% in 1955) and the exchange system was freed of most controls. In 1957, however, the stabilization effort has faltered and is marked by a huge budgetary deficit (30 billion pesos), a rapid expansion of credit, and an undiminished rate of price increase. In part, the drop in the price of copper (from a planning figure of 35 cents to 26 cents) was an important factor in failure to balance the Government’s accounts. Gold and dollar reserves, which were $62.3 million at the end of 1956, declined to $54.3 million on September 15, but it should be pointed out that Chile also borrowed $17.5 million of short-term funds during this time and also received PL 480 assistance. Present indications are that the stabilization program will fail unless drastic measures are taken to curtail credit and budgetary deficits which the Central Bank and governments appear unwilling to do. Despite the availability of $12.5 million from the Eximbank not yet unconsummated loan, it is clear that Chile will require substantial foreign financing in 1958 if commercial arrears are not to appear even should copper go up a few cents.

Colombia: Despite high export receipts in 1955 and fairly good earnings in 1956, an internal expansion based on over-investment and over-consumption led to the accumulation of about $450 million of arrears to foreign creditors. Just prior to the fall of the Rojas Government in May 1957, negotiations were opened for settlement of these arrears. Negotiations have now been concluded except for a rather small amount owed to non-U.S. creditors. In essence, the settlements involved the use of Colombian reserves, borrowing from the Eximbank and New York banks ($87 million), and 30 month payment terms on the remainder. A $25 million standby also was arranged with the IMF and a program of austerity announced. However, the latter program appears to be faring badly: the budget will show a deficit of 300–400 million pesos for 1957; credit restrictions have not been adequate; and imports are running over $40 million against a target of $23 million monthly. In addition, coffee prices have fallen to the lowest levels since 1950. Only a reversal of internal financial and fiscal policy and a renegotiation of the arrears settlements will permit Colombia to go through 1958 without further loans from abroad or the creation of new arrears.

Costa Rica: In 1956 there was a 20% decline in export earnings (loss of bananas from floods and blowdowns, low cacao prices, and small sugar crop) while imports rose by 10%. The result was a trade deficit of $27.6 million and a loss of $8.9 million in reserves, which fell by year-end to $14.5 million, lowest level since 1951. Capital inflow from banana companies, IBRD, Eximbank, and for the Inter-American Highway forestalled a larger decrease in reserves. During 1956 internal financial stability was maintained despite 11% increase in bank loans. For 1957 the outlook appears bright with replenishment of reserves to $23 million on June 30, 1957, compared with $22.6 million for the same date of previous year and seasonal decline in reserves has thus far been normal. Exports appear to be moving well and financial policy has been conservative. A notable feature of Figueres regime has been rather heavy state investment in traditionally private enterprise fields.

Cuba: Economic activity is at record levels especially owing to an excellent sugar crop sold at very remunerative prices and a program of high public investment. However, a substantial part of public investment has been financed through an increase in debt which increased from $270 million in 1953 to $704 million on June 30, 1957. In addition, Government borrowing from the Central Bank and private banks has increased rather excessively during 1957. On the other hand, capital inflow and a moderate financial policy have compensated for the expansionary effects of the Government’s public works program. International reserves, which fell to $479 million at the end of 1956 increased to $547 million on July 31, 1957, as sugar was exported at bonanza prices. While reserves should decline to about $485 million by the end of the year, they are very ample for some $650 million of imports. The outlook in the face of lower sugar prices is for a reduction in exchange reserves during 1958 which could be partially compensated for by a lower rate of public investment.

Dominican Republic: With high sugar export earnings, it is expected that foreign exchange receipts will in 1957 top those for the record year 1956 by a considerable margin, despite lower coffee prices. With imports fairly stable, gold and U.S. dollar reserves increased from $49 million at the end of 1956 to $63.6 million at the end of July 1957, historically the largest holdings. Economic activity appears to be at record high levels. Prices have remained stable for a number of years and monetary policy has been able to maintain a constant money supply. However, over 50% of the financial resources of the country are preempted by official agencies indicating that statism is a basic factor of economic organization.

Ecuador: As a result of heavy expenditures by the previous government, by the middle of 1956 a budgetary crisis was faced by the incoming Ponce Administration. Rather strong measures including new taxes, expenditure reductions, and the consolidation of floating debt, were effective in dealing with the problem. Since April there has been a 60% expansion in Central Bank credit to the public and money supply to close to the December 1956 record levels. With demand for imports high, increased liquidity poses problems for the maintenance of international reserves at adequate levels. Such reserves were $23 million on August 31 compared with $21.3 million for same date last year after reaching high of $27.6 million on January 31. An IMF drawing of $5 million (50% of quota) was made in June and is to be repaid by the end of this year. Taking into account this drawing, reserves would have been $18 million on August 31, well below last year’s. It is important for a close rein to be held on internal monetary expansion so that the seasonal increase in reserves will be sufficient to meet next year’s exchange needs.

El Salvador: With excellent coffee and cotton crops and exports at high levels, gold and dollar reserves climbed to $68.5 million on July 31, 1957, a record. The seasonal decline for the second half of 1957 will probably reduce such reserves to about $50 million, about equal to six months’ imports. Internal financial stability has been maintained. With coffee amounting to over 70% of exports, earnings are vulnerable to undue fluctuations, but reserves should be adequate to deal with losses of foreign income from lower coffee prices, and despite present slow export sales of coffee.

Guatemala: Although receiving U.S. Grant Aid of $15 million in FY 1957 and an expected $10 million in FY 1958, official gold and dollar reserves rose to $83.9 million by April 30, 1957, the highest on record. Since then a seasonal decline has reduced them to $75.2 million, well above the previous year; this is equal to about seven months’ imports. The latter have increased to such a degree that exports since 1956 are not earning enough to cover import costs, which were financed by increasing foreign debt and by external aid. The high rate of public and private investment was the basic factor in the strong import demand. Money supply has not increased excessively and the Government appears to be financing its deficits from domestic savings and Grant Aid, the latter being a windfall to the economy.

Haiti: As a result of Hurricane Hazel in 1954, a sharply reduced coffee crop, and repeated changes in governments, there was a $10 million balance of payments deficit in FY 1957 ending September 30, 1957. This deficit was financed by reducing dollar reserves, defaulting on foreign debt, ICA Special Assistance, and drawing on private bank balances abroad. The following reduction in incomes had the effect of lowering import demand and so easing the burden on the balance of payments. Despite continued political turmoil, it is hoped that a good coffee crop beginning October will replenish reserves and make possible servicing of foreign debt. A $1 million drawing ($7.5 million is quota) from the IMF is now being made. In addition, $1 million of ICA Special Assistance from FY 1957 is being withheld until satisfactory measures are taken by the Haitian Government in the Talamus case. In view of deleted [depleted] reserves, Haiti will probably require the $2 million grant assistance allotted from FY 1958 funds. Once the new Government is in power, the IMF will enter into a stabilization agreement, which is being adhered to by the National Bank on an informal basis, supported by additional funds beyond the $1 million.

Honduras: Despite heavy cash requirements, which resulted in substantial budgetary deficits, the Central Bank and commercial banks have maintained conservative policies directed toward internal financial stability. With foreign and internal debt at low levels, there is some room for expansion of borrowing for development purposes. However, the outlook for the balance of payments is not bright owing to the secular decline in the banana industry. Gold and dollar reserves are adequate at $22.9 million (May 1957), although somewhat lower than holdings in 1953 and 1954. In February, 1957, a drawing of $2.5 million was made from the IMF to cover a seasonal decline in reserves and was repaid in August. It is expected that lower foreign earnings, especially because of reduced tax and investment receipts from the banana companies, will create further pressure on reserves. The Embassy reports that a request is being made of the IMF for a $7.5 stabilization agreement which has not yet been confirmed here. A development program for road and electric power construction has received the general approval of the IBRD subject to satisfactory financing of local currency costs. Total requirements in local currency are estimated at about $20 million for the period, 1958–61. How much of this amount could be obtained from internal non-inflationary sources has not been fully explored.

Mexico: As a result of high level exports, record tourism receipts, and sharp industrial expansion by the end of 1956, Mexico had accumulated official gold and dollar reserves of $471 million, an increase of $260 million for the years 1955 and 1956. Thus far in 1957 there has been a reversal and the loss of reserves was $410 million by August. This loss of reserves was mainly the result of lower exports and higher imports despite somewhat increased earnings from tourism. With lower prices in view for minerals and coffee, it is unlikely that reserves will be rebuilt to 1956 year-end levels in the near future. However, reserves are fairly substantial when one considers that they are equivalent to more than six months current imports. On July 1 the Bank of Mexico relaxed reserve requirements on private banks, a measure which was of doubtful value at a time when the international payments outlook had become less promising. Mexican official estimates expect a moderate decline in reserves over the next year.

Nicaragua: During 1956 and 1957 there were shortfalls in the basic export crops, coffee and cotton, so that international reserves declined to such an extent that in November 1956 a standby of $3.75 million was arranged with the IMF. Only one half of this amount was actually utilized and repurchase was made early in 1957. However, further deterioration has occurred since that date. While normally reserves are accumulated in the first half of the year during the export season, they are run down during the remainder of the year falling to lows by December. By the end of 1956 such reserves were down to $8.5 million, the lowest amount since 1950, and were expected to fall to about zero at the end of 1957. To cover the next six months payments’ requirements, therefore, in October an IMF standby agreement was negotiated permitting drawings up to the full quota of $7.5 million. While undoubtedly repurchase of any dollars used can be made from export proceeds during the first half of 1958, it appears fairly certain that another standby will be needed for next year. A U.S. Treasury exchange agreement to a maximum of $5 million is now being finalized which will provide window-dressing behind the IMF agreement. The IMF is giving advice on the fiscal and financial measures necessary to restrain import demand since imports have continued at rather excessive levels despite the fall in exchange earnings. At the same time the Government plans to expand coffee production and has entered into informal discussions with the IBRD for a $1.5 million loan for pesticides and fertilizers.

Panama: In post-war years imports have exceeded exports by about $40 to $50 million annually with accounts being balanced by transactions with the Canal Zone. In this way equilibrium has been maintained although gold and dollar reserves have recently declined $39.2 million, the lowest level in the past few years, but still close to their maximums. Efforts are being made to diversify exports to reduce the heavy reliance on banana exports. Imports during 1957 have run well above 1956 levels, the increase being about equal to the loss in reserves. The cost-of-living has been virtually unchanged since 1951. Unless there is a sharp decline in receipts from the Canal Zone, the financial situation should continue favorable.

Paraguay: In March, 1956, a limited stabilization effort was made under technical advice from the IMF. In September, 1957, a more fully developed program was put into effect supported by $5.5 million from the IMF and a $5.5 million exchange agreement with the U.S. Treasury since Paraguay’s international reserves were negligible and support was required to permit an orderly market for the newly unified fluctuating rate of the guarani. The stabilization agreement also fixed ceilings on credit and Government borrowing, and established additional sources of revenue. Despite these measures, drawings of $3.5 million had to be made against the IMF account, of which over $2 million was to pay commercial arrears. The IMF is unhappy over the situation and is reviewing the whole program. On November 1, Paraguay must pay a $589,000 installment (of which $329,000 is U.S. dollars) on a $5 million IBRD loan. It is feared that no funds will be available for such a payment unless the IMF agrees to make further releases and agrees to utilization for this purpose which the IMF Staff holds is contrary to the terms of the Stabilization Agreement. On the other hand, the IBRD has expressed an unwillingness to extend the repayment terms.

Peru: In 1956 economic activity was at record levels, foreign investment high, and with the demand for exports strong, foreign exchange reserves rose by $15 million to $41.7 million by year end. Gold holdings continued at $35 million. However, there was a substantial fiscal deficit financed by the Central Bank. Recent months have shown a sharp drop in export income while fiscal deficits and private credit expansion have been heavy. Money supply continues to increase at the rate of 20 percent per annum despite losses of foreign reserves, which fell to $15 million in September. The Government took ineffectual measures late in 1956 to control credit expansion, and in March 1957 rather high marginal reserve requirements were imposed on private banks, but since penalties for failure to meet reserve requirements are negligible there was only a minor slacking in the rate of monetary expansion. Exchange rate policy has been directed toward defense of the rate. Without a strong effort to dampen down the internal expansion to conform with anticipated exchange income, it may be expected that foreign exchange reserves will continue to decline and external resources may be needed.

Uruguay: The volume of foreign trade has not increased notably during the post-war period. Since there is a large passive trade balance with the U.S. and other currencies earned are not convertible into U.S. dollars, there is normally pressure on gold and convertible currency reserves. The multiple rate structure aimed at income distribution, resource allocation, export promotion, and import restriction is now being considered by the IMF and it is expected that an unfavorable decision will be requested of the Executive Directors. Despite gradual depreciation of the peso, internal inflation and the ineffectual policies have caused a decline in new gold and foreign exchange to $88.4 million on July 31, the lowest since World War II; in 1956 alone losses were $63 million. Recent efforts to obtain financial assistance in the U.S. have been unsuccessful. Budgetary deficits have contributed to inflationary pressures. The wool export season is to commence in October and indications are that some devaluation will be necessary to move stocks, which has serious implications for any move to eliminate or reduce the countervailing duty imposed by the U.S. Treasury on wool tops.

Venezuela: With official gold and U.S. dollar reserves at $1.3 billion, Venezuela holds about 50 percent of all the international reserves of Latin America. Expansion of petroleum imports as a result of the Suez Crisis and the sale of new concessions have caused a substantial gain in foreign earnings. Petroleum production is now expected to decline moderately in face current oversupply conditions and U.S. import restrictions. The effect, however, on the huge international reserves is expected to be minor. Some efforts at the creation of domestic industry are officially supported by tariff measures. The cost-of-living has been stable and monetary expansion is largely the result of the positive balance of payments.

Table I

EXTERNAL FINANCIAL REQUIREMENTS FOR LATIN AMERICA FOR 1958²

Probably Will Require B/P Aid	May Require B/P Aid	Probably Will Not Require B/P Aid
Argentina	Ecuador	Costa Rica
Bolivia	El Salvador	Cuba
Brazil	Uruguay	Dominican Republic
Chile		Guatemala
Colombia		Mexico
Haiti		Panama
Honduras
Nicaragua
Paraguay
Peru

Table II

INTERNATIONAL MONETARY FUND

Latin-American Quotas, Drawings, and Stand-By Arrangements

(millions of dollars)

Country	Quota	Drawing	Available Stand-By
3Argentina	150	75	—
3Bolivia	10	6.5	3.5
3Brazil	150	75	—
3Chile	50	24.8	22.5
3Colombia	50	25	25
Costa Rica	5	—	—
Cuba	50	—	—
Dominican Republic	10	—	—
3Ecuador	10	5	—
El Salvador	2.5	—	—
Guatemala	5	—	—
Haiti	7.5	1	—
Honduras	7.5	—	—
Mexico	90	—	—
Nicaragua	7.5	—	7.5
Panama	.5	—	—
3Paraguay	7.5	5	2.5
Peru	25	—	12.5
Uruguay	15	—	—

1. Source: Department of State, Central Files, 820.10/10–1757. Official Use Only.
2. Assumes continuation of present policies by Government and monetary authorities. [Footnote in the source text.]
3. Drawings at 50 percent of quota or above. [Footnote in the source text.]
3. Drawings at 50 percent of quota or above. [Footnote in the source text.]
3. Drawings at 50 percent of quota or above. [Footnote in the source text.]
3. Drawings at 50 percent of quota or above. [Footnote in the source text.]
3. Drawings at 50 percent of quota or above. [Footnote in the source text.]
3. Drawings at 50 percent of quota or above. [Footnote in the source text.]
3. Drawings at 50 percent of quota or above. [Footnote in the source text.]