279. Current Economic Developments1
[Here follow reports unrelated to Bolivia.]
US Assists in Bolivian Currency Stabilization
On December 15 the five-month old Bolivian Government of Hernan Siles Zuaso announced a series of economic stabilization decrees to halt the serious inflation in Bolivia and to restore confidence in the boliviano. To support Bolivian stabilization efforts the International Monetary Fund has agreed to a one-year standby arrangement under which Bolivia may purchase foreign currencies from the Fund equivalent to US $7.5 million. Further important support for the stabilization effort will be provided by the US Treasury and ICA. The latter is making available $10 million of US aid to Bolivia to be used in support of the program, and a US Treasury exchange agreement provides that Bolivian authorities may request the US Exchange Stabilization Fund to purchase bolivianos up to an amount equivalent to $7.5 million.
Under the new stabilization program, President Siles is granted emergency powers by law to enter commitments to obtain stabilization loans and to take any measures necessary for economic stabilization such as those affecting monetary and fiscal problems, wages, banking, price control and regulation of public utilities. The program abolishes government controls as far as possible in the fields of exchange, imports, and prices, and envisages a single fluctuating exchange rate reflecting supply and demand forces. It is hoped that if the price of tin—Bolivia’s major export—remains high and if mining, industrial and government workers accept the one-year wage freeze provided in the plan, the Bolivian economy may respond favorably to realistic prices and a realistic exchange rate.
[Here follows a history of the Bolivian economic situation.]
Stabilization Program President Siles early announced his determination to carry out comprehensive stabilization measures, despite opposition from both conservative and leftist elements. The program was prepared by the Bolivian National Monetary Stabilization Council headed by Siles and aided by three US financial advisors2 and in [Page 582] consultation with a recent IMF mission to Bolivia.3 Under the program, a new fluctuating unified exchange rate will apply to all transactions, replacing the present multiple exchange system. New simplified arrangements will apply to exports and imports. Private imports will be subject to no restriction except the new customs tariff.
A second series of measures concerns the adjustments in the prices charged and the costs incurred by the autonomous agencies, in order to eliminate their operating deficits. The Mining Corporation, the Mining Bank, the Petroleum Corporation and the Development Corporation have all submitted their 1957 budgets to the Stabilization Council, which has approved them and has suggested some major institutional reforms.
In the sector of government finance, the budget will be a comprehensive one including all the deficits of the autonomous agencies, contributions to various organizations previously entitled to the proceeds of special earmarked taxes, and US aid counterpart projects. Also the Government will pay the prevailing rate of exchange rather than the previous 190 rate. Wage and salary increases are taken into account. The Government will, however, continue the employment freeze in civil service positions begun in 1956. Expenditures other than wages and salaries will be reduced to operating costs and capital expenditures of all types are to be sharply reduced or postponed. Control over expenditures will now be exercised before rather than after contractual obligations are made. The principal sources of new tax revenue for the 1957 budget will be a new royalty tax on mineral production, a new customs tariff, a new tax on petroleum products and a general sales tax. The administration of income taxes will be improved. Local currency proceeds of US aid during 1957 will be used directly or indirectly, where necessary and possible, to cover projects for which revenue under the budget is not available.
A number of measures will be taken with regard to price and rent control policies. Among the most important are the elimination of price control and revision of public utility rates. Goods supplied under the US aid program are to be sold at domestic currency prices which cover the world market price of imports at the free market exchange rate plus the costs of distribution.
[Page 583]Bank credit will continue to be controlled and existing deposits of the commercial banks will be frozen and released only in the event of a decline in deposits and in accordance with new specified rules. New reserve requirements will come into force along with a new maximum ratio of deposits to capital and reserves. Other decrees will concern government and agency accounts, reports to the Central Bank by commercial banks, rediscounts, etc. Adjustments will also be made in the wage and social security policies, which have contributed to the inflation problem.
An important part of the stabilization program is the exchange budget, the primary purposes of which are to limit the imports of the government sector, thus leaving a larger role for private importers, and to bring exchange expenditures in line with foreign exchange earnings. One of the problems in connection with the exchange budget was that of bilateral trade and payments agreements. These agreements have been regarded by Bolivia as a temporary expedient, however, made necessary in some cases by petroleum marketing difficulties. They are expected to become less important in the future, particularly with the completion of the construction of the proposed pipeline to the Pacific.
As a part of the effort to restore its financial standing, Bolivia has reached a tentative agreement with the Foreign Bondholders Protective Council to resume modest service payments on its dollar bonds of about $55 million in principal amount which have been in default since 1931.
Stabilization Fund Assistance To assist in the stabilization program from the exchange aspect, the IMF has agreed to an arrangement under which Bolivia may purchase foreign currencies from the Fund equivalent to US $7.5 million. The Treasury Exchange agreement allows purchase up to another $7.5 million should the occasion for such purchases arise and only after the IMF fund is fully drawn. Bolivia would subsequently repurchase for dollars any bolivianos so acquired by Treasury.
The ICA assistance amounts to making available $10 million in its bilateral aid program with Bolivia to assist in the stabilization program. This assistance comes from part of the ICA regular program for financing imports. The contribution may, however, be used in part for the purchase of commodities essential to the stabilization program under specified procedures and if funds are not appropriately available from other foreign exchange holdings of the Bolivian Government. Part of the imports of foodstuffs which would have been financed through regular ICA assistance is expected to be replaced through sales from surplus stocks under a PL 480 Title I program totalling $6.75 million in commodities, principally wheat [Page 584] and wheat flour with additional quantities of dairy products, edible oils and lard now ready for negotiation.
- Source: Department of State, Current Economic Developments: Lot 70 D 467. Confidential.↩
- Along with George Eder, Ernest O. Moore and Roger R. Freeman were serving through the ICA as financial advisers to the Bolivian Government. Moore had 35 years experience in commercial and central banking, including 20 with the Federal Reserve Bank of New York, 5 with the Bank for International Settlements in Basle, and 3 as financial adviser to the Government of Haiti. Freeman was a tax expert who had been an adviser to the State of Washington, assisting in the reorganization of the State’s tax administration.↩
- The mission was headed by Dr. Gesualdo A. Costanzo, former economist of the U.S Department of the Treasury and chief architect of the Greek stabilization plan of 1947. The mission arrived October 13 and departed November 16.↩