540. Current Economic Developments1
[Here follows discussion of matters unrelated to Peru.]
Peru Beset by Monetary Crisis
The Peruvian Government is grappling with potentially serious monetary problems. In recent years such problems have been unusual in Peru and the Government has outlined a program designed to remedy them. It has also indicated interest in a special Eximbank loan.
Background The Prado Government, which took office in mid-1956 as a result of the first democratic election in some ten years is facing its first real economic crisis.
When the Government came into power last July, it made little change in the fundamentally desirable economic policies which had been followed previously. Like his predecessor, the new President favored policies designed to encourage the effective operation of a free enterprise system and private foreign investment.
The Peruvian economy continued its satisfactory progress during 1956. By mid-1957, however, the picture was less rosy. While production probably had increased during the first half of the year, the rate had been slower than previously. Exports also had increased more slowly than in 1956. Imports had increased more rapidly than exports, creating a less favorable balance-of-payments outlook. The expansion in the money supply and rise of prices, which have long been a problem, had proceeded at a more rapid rate. Industry was confronted by extensive demands from the labor unions. Work stoppage as a result of labor disputes had become common and threatened to become more prevalent. Contributing to this generally unsatisfactory situation was the decline in world prices of copper, [Page 1084] lead and zinc, which account for one fourth of Peru’s exports. The less favorable economic developments with respect to finance and labor stemmed mainly from the weakness of the new democratic government in dealing with some of the hard political pressures with which it was faced.
The problems noted at mid-year became more pronounced in the ensuing months. Inflation was mounting, the balance-of-payments situation was increasingly unfavorable and the reserves had declined seriously. By the end of October, Peru’s reserves had dwindled to $9 million, with the prospect that without urgent measures, reserves would be gone within a month or so.
Government Plans Faced with an increasingly serious crisis, the Government is inaugurating an anti-inflation program. Credit restriction plans include stoppage of rediscounts, cessation of new funds to development banks, and arrangements whereby all new Government deposits will be placed in the Central Bank rather than in commercial banks. As to the excessive bank credit, measures were taken to compel banks to comply with the reserve requirements. With the recent decline in the exchange rate, banks are expected to be more cooperative with regard to reserve requirements than heretofore.
As to Government spending, the Administration hopes to keep the level down to that of the 1957 budget. Any decrease below the 1957 level is considered politically impossible.
On the income side, the Government hopes to obtain some 750 million soles of new revenue in 1958. Peruvian officials hope to get 150 million soles from stricter tax collections, 200 million from new taxes (primarily on beer, alcohol, dividends and overdrafts) and 400 million from increased import duties on some 40 of Peru’s imports.
The Government has also taken energetic action which, at least temporarily has practically ended the rash of strikes.
Peruvian officials have explained that once their house has been put in order, they hope to obtain a substantial loan from the Eximbank to cover dollar purchases. As support for their appeal, they refer to their anti-inflation program. Also they maintain that many of their economic problems were inherited from the previous government. A Peruvian official is visiting Washington soon to discuss Peru’s problems with the Eximbank, the International Monetary Fund, and other interested agencies.
US Position On November 10 our Ambassador, on instructions, informed the Finance Minister that the US appreciates the fact that Peru’s financial situation is weakening and is convinced of the importance of corrective measures such as credit restrictions and reduction in the budget deficit. As to Peru’s desire for Eximbank credits, the Ambassador stated that the Bank does not consider itself an appropriate agency for stabilization operations and its assistance [Page 1085] would be more properly related to financing specific import requirements, consistent with Peru’s stabilization objectives, according to the need for and the nature of imports. If Peru takes adequate corrective measures, the Ambassador said, the existing $30 million stabilization fund ($12.5 million Treasury, $12.5 million IMF, $5 million Chase Manhattan Bank) should be sufficient.
The Ambassador also referred to current conversations between the Eximbank and the Peruvian Embassy about lengthening the time for certain repayments of the Peruvian Government and mentioned the US preference for excise taxes rather than increased duties as a means of increasing income.2
[Here follows discussion of matters unrelated to Peru.]
- Source: Department of State, Current Economic Developments: Lot 70 D 467. Confidential.↩
- Ambassador Achilles reported on his conversation with Peruvian Minister of Finance Juan Pardo in telegram 473 from Lima, November 11. (Ibid., Central Files, 823.10/11–1157) He had been instructed by the Department to make such representations in telegram 270 to Lima, November 8. (Ibid., 823.10/11–857)↩