Foreign Relations of the United States, 1958–1960, Volume V, Microfiche Supplement, American Republics

BL–23. Memorandum from the Under Secretary of State for Economic Affairs’ Special Assistant (Leddy) to the Under Secretary of State for Economic Affairs (Dillon)¹

Washington, May 8, 1959

SUBJECT

• Level of Assistance to Bolivia for 1959

You have asked that the Bolivian aid program be reviewed to determine whether assistance should be continued at the level of $23 million originally programmed last September for FY 1959, or whether it should be reduced to $18 million.

ICA and USOM Bolivia have continued to believe that an aid level for FY 1959 of $23 million is excessive in the light of Bolivian performance and needs and that $18 million is adequate in the circumstances.

ARA and OFD believe that the additional $5 million which Ambassador Bonsal, on authorization of the Department and ICA, told the Bolivians would be available if we found it was needed and subject to satisfactory performance by the Bolivians on stabilization, should be provided as indicated. They believe the full $23 million is necessary (a) to support the stabilization program to which we are committed, (b) because of the desirability, both politically and economically, for as much development activity as is practicable to go forward at this time, and (c) because our failure to provide the full support Ambassador Bonsal announced would be difficult for the Bolivian Government and people to understand now, when the Government has just successfully carried through a politically extremely risky operation to achieve an important stabilization objective, i.e., the unfreezing of commissary prices, and also since we will be continuing to condition releases of cash support on performance on the stabilization commitments of the Bolivian Government to the IMF.

The relevant facts, from an examination of USOM and IMF documents as well as conversations with the USOM Director, Mr. Rey Hill, the U.S. Executive Director on the IMF,² the staff of the IMF and Department personnel, appear to be as follows:

1. The United States aid program has two major economic objectives in Bolivia of an immediate nature (there are other longer-term goals). These are (a) monetary stabilization, which the U.S. and the IMF have in common, and (b) economic development, which is a U.S.-supported objective to be achieved separately from but consistently with monetary stabilization.

2. As in other countries, the U.S. relies heavily on the IMF for establishing the Bolivian monetary stabilization program and for influencing the Bolivian government to adhere to that program. The 1959 target of the IMF, agreed upon with the Bolivian government, is to avoid depreciation of the present exchange rate of 12,000 bolivianos to the dollar while maintaining a free exchange system. To achieve this the IMF has reached agreement with the Bolivian government on the controls to be applied to the sources which generate monetary pressure, chiefly the budget, Central Bank credit, the use of aid counterpart, and wage and subsidy policy. A key issue between the Fund and Bolivia—the immediate reduction and early elimination of subsidized prices in the commissaries of the mine workers—has just been settled on a basis which the Fund considers will, together with other commitments, justify a new standby agreement and a further credit to Bolivia of $1.5 million.

3. The U.S. Director in the Fund and the Fund management, while conceding that the Bolivian stabilization program might well fail, consider that the prospects and performance in Bolivia are such that the Fund should not refuse its continued backing at this juncture.

4. The Fund stabilization program for 1959, which will come before the Board in the next week or so, is based upon an assumption of U.S. aid in calendar 1959 at a level reflecting the $23 million for FY 1959 contingently indicated last September. The Fund projection, however, assumes certain developmental expenditures, to be financed from counterpart, which are based on USOM’s and Bolivia’s developmental plans. It is this area of developmental expenditure which creates the difference of view as to the need for the additional $5 million.

5. To understand the above, a few figures are necessary showing the relationship between dollar aid, the generation of counterpart, and the uses of counterpart:

Origin of Funds	Dollar Aid ($ Million)	Counterpart (Billions of bolivianos)	Use of Counterpart
Counterpart of FY 1959 aid spent in CY 1958	2.5	25)	Sterilization Agreed1/
Counterpart from aid		)—
prior to FY 1959		35)
Total counterpart on deposit 1/1/59		60
Counterpart from FY 1959 aid spent in CY 1959 to date (April 1959)	1.5	18)	Sterilization proposed2/
Other counterpart as of		) 25
end of April, 1959		7)
Total counterpart on deposit 4/30/59		85
Counterpart collections in CY 1959 from aid prior to 1958		21)
Fiscal 1959 aid not yet		)
spent:		) 117	Budget
Cash	8.0	96)
Commodities	6.0	31)3/
Contingent (commodities or cash)	5.0	) 60) 117	Development
Counterpart collections in		)
1959 from 1958 aid funds		26)
	23.0
1/ Sterilization agreed upon by IMF, U.S. and Bolivian Government. 2/ Sterillization proposed by IMF to U.S. Government. 3/ IMF states that low ratio of counterpart figure to dollar figure arises from certain subsidized procurements (e. g. wheat) and lags in collection.

On the basis of the above, the Fund staff asserts that if USOM will sterilize existing counterpart on deposit at the level of 85 billion bolivianos, which the Fund believes should be done to prevent inflationary pressure, then USOM cannot finance 117 billion bolivianos for development out of counterpart without an aid level of $23 million. In other words, the Fund contends that if aid is reduced by $5 million, then the equivalent counterpart would not be available for development expenditures, and if such expenditures were financed through other means, severe inflationary pressure would result and the stabilization program would be impaired.

7. ICA is not certain that the above analysis of the Fund with respect to the development sector is correct. Nevertheless it is prepared to agree (a) that counterpart deposits at the existing level of $83 billion bolivianos should be sterilized (except that the need for sterilization at that level will be re-examined periodically by USOM and IMF representatives), and (b) that the additional $5 million should be drawn upon to the extent determined to be necessary by USOM to provide counterpart for agreed projects in the development sector, which may or may not reach 117 billion bolivianos. It also recognizes that some or all of the additional $5 million may have to be provided in the form of a cash grant.

Recommendations:

1. That not more than $18.0 million be approved for Bolivia from U.S. fiscal year 1959 funds; and that the possible need for up to an additional $5 million in the form of cash grants or otherwise from FY ‘60 funds in the last half of calendar 1959 be recognized (a) as determined by the USOM to be necessary to provide counterpart for agreed investment projects and (b) contingent upon satisfactory performance by the Bolivian Government on its commitments to the IMF regarding stabilization.

Approve _______________³

Disapprove _____________

2. That USOM sterilize counterpart deposits at not less than 85 billion bolivianos.

Approve _______________⁴

Disapprove _____________

3. That Embassy/USOM La Paz be instructed to accelerate efforts to reach agreement with the Bolivian Government on the development projects for which counterpart expenditure will be required.

Approve _______________⁵

Disapprove _____________

1. Source: Department of State, ARA/WST Files, Lot 63 D 61, “Porter-Hardy Subcommittee.” Confidential. Drafted [illegible in the original] by Leddy; concurred in by ARA, W/NSC, ICA, and the Treasury Department.
2. Frank Southard, Jr.
3. Recommendation 1 initialed “Approved” and stamped May 8, 1959.
4. Recommendation 2 initialed “Approved” and stamped May 8, 1959.
5. Recommendation 3 initialed “Approved” and stamped May 8, 1959.