Foreign Relations of the United States, 1958–1960, Volume V, Microfiche Supplement, American Republics
ETA–27. Letter from the Acting Assistant Secretary of State for Congressional Relations (Hoghland) to Senator Thomas H. Kuchel.1
I read with interest your letter of December 1, 1959 to Under Secretary Dillon,2 regarding stabilization programs in Latin America in which the United States Government participates in cooperation with international institutions and private banking groups.
In general such programs have achieved a substantial degree of success in arresting inflation in Latin America and creating a firm basis for sound economic development. There now exist nine such programs in operation. The countries involved are: Argentina, Bolivia, Chile, Colombia, Haiti, Honduras, Mexico, Paraguay and Peru. Several additional programs are now under active consideration. In your letter you state that Uruguay had decided not to participate in any stabilization program under the International Monetary Fund. Actually, the country in this case was not Uruguay but Brazil.
The information you request on the stabilization programs for Argentina, Bolivia, Colombia and Paraguay is given in some detail in the enclosure. I hope that this information will meet your request. Since the financial affairs of other governments, international organizations and private banks are involved, the material in the enclosure is not intended for public use.
Sincerely yours,
Acting Assistant Secretary for Congressional Relations
Enclosure
Statement Prepared in the Office of Inter-American Regional Economic Affairs
ARGENTINA
In December 1958, the United States Government, private financial institutions and the International Monetary Fund announced credits of $329 million to assist Argentina in its efforts to achieve financial stabilization and economic development. This program, according to the Eximbank, was one of the most comprehensive financial operations ever undertaken by the United States in Latin America. The $329 million of credits were broken down as follows: $125 million from the Eximbank of which $100 million was to be used to finance purchases from the United States of equipment for economic development projects, and the remaining $25 million was to be used to maintain the flow of essential imports from the U.S. during 1959; a $25 million loan from a consortium of U.S. private commercial banks to meet short term financial requirements; a $50 million exchange agreement from the United States Treasury through the Exchange Stabilization Fund; a $25 million loan from the Development Loan Fund; and a $75 million standby arrangement with the International Monetary Fund. Previously the Argentine government had arranged with the members of the Paris Club (West Germany, Austria, Belgium, Denmark, Italy, Great Britain, France, Norway, Sweden, Switzerland and The Netherlands) for substantial credits in order to deal with its commercial arrearages with those countries. An arrangement was made whereby Argentina funded debts owed to those countries, amounting to about $450 million, and was permitted to repay them over a period of 10 years; debts to Japan were included in these arrangements.
The $329 million of loans was made because Argentina agreed to a full stabilization program with the International Monetary Fund. At the time those loans were made the Argentina international payments position was critical with gross foreign exchange reserves down to a historic low of $129 million compared with $286 million at the end of 1957, $382 million at the end of 1956, $457 million at the end of 1955 and $524 million at the end of 1954. In addition, because of heavy fiscal deficits and virtually uncontrolled credit expansion, the price level in 1958 rose by 32% while production actually declined. Under the International Monetary Fund stabilization program the Argentine government committed itself to extensive alterations in its financial and economic system and import and exchange controls were almost abolished and a single fluctuating exchange rate was established; the budgetary deficit [Typeset Page 75] was to be substantially reduced by the curtailment of expenditures and the imposition of new taxes and other sources of revenue; commercial bank credit was to be limited and at the same time internal subsidies which had distorted the price structure were to be eliminated. As a consequence of these radical steps which were necessary to eliminate distortions in the economy, there was a sharp upward movement in prices during 1959 because of the depreciation of the exchange rate, the dropping of subsidy payments on basic articles of consumption, and the continued necessity to increase wage rates. As a result the cost of living increased by 75% during the first six months of [Facsimile Page 3] 1959. However, once the initial adjustments in the price structure were made and the budgetary situation improved, there was a noticeable tendency toward price stability. In July and August 1959 the cost of living increased by 3.5% per month and the October increase was only 6%. The wholesale price index began to decline in September. The government was also able to keep new wage increases to relatively moderate levels. With these a signs of stability, there was an inflow of private capital and the foreign reserves of the Central Bank doubled in the four months July—October. By the end of October 1959 exchange reserves were up to $344 million gross. During 1959 money supply increased at a lower rate than the previous year despite the increase in foreign reserves and the free rate of exchange fluctuated between 80/85 pesos per dollar. At the same time the Argentine government entered into large scale contracts with foreign petroleum companies for the production of oil in Argentina and it is envisaged that by 1961 Argentina will be about self-sufficient in that product, thereby saving almost $250 million of import requirements per year.
All indications are that per capita national income in 1959 will be somewhat less than 1958 but exceed the level of 1957. A large part of this decline probably results from losses of production through strikes against government efforts to maintain wage levels in face of rising prices, but these strikes have lately diminished in number and intensity. The national budget of Argentina in 1959 had a deficit of about one half that of 1958; a large part of this reduction came from raising rates for public services, such as, railroad fares, post office services, telephone rates, etc. While there is still a budgetary gap a strong effort will be made to obtain balance in 1960.
The stabilization program for 1960 has now been approved by the International Monetary Fund which on December 2, 1959 made available a standby of $100 million to Argentina. Since that country had only actually drawn about $40 million of the previous standby of $75 million, in effect, this involved making available $65 million of new funds. Under the International Monetary Fund standby Argentina committed itself to balance the budget of the central government although it was [Typeset Page 76] recognized that there would be a deficit in the overall public sector accounts; that deficit was to be covered by non-inflationary borrowing. Ceilings are set on the level of domestic assets of the Central Bank and a prudent policy was to be maintained with regard to bank credits to the private sector. The existing single fluctuating exchange is to be continued.
In addition to the International Monetary Fund standby fund, Argentina is attempting to secure credits from the other participants of the previous loan package arrangement. The Western European countries probably will make available between $75/80 million of which about $50 million will be used to [Facsimile Page 4] cover debt payments under the Parle Club refunding plans so that the new money will come to about $25/30 million. Commercial banks in New York City have been approached by the Argentines and they may make available about $50 million or more. Of this amount some $41 million would have to be used to repay maturing commercial bank credits during 1960. Also, the Eximbank and the Development Loan Fund may make financial facilities available to Argentina. It is understood that the above loans are in various stages of negotiations.
BOLIVIA
As a result of balance of payments deficits which exhausted Bolivia’s foreign exchange reserves and a hyper-inflation which created social unrest and a reduced standard of living, discussions were begun in 1954 looking toward stabilization effort. In December 1956 the International Monetary Fund provided $7.5 million to support a stabilization program which included a grant of $10 million from ICA in the form of procurement authorizations and a cash grant subject to the supervision of the United States Operations Mission in Bolivia. In addition, the United States Treasury made available to Bolivia an exchange agreement of $7.5 million. This joint program required the unification of the exchange rate at a realistic level, an attempt to balance government expenditures and receipts in order to eliminate inflationary financing from the Central Bank, a reduction in bank credit expansion, and the removal of all economic controls and subsidies except for a wage and salary freeze. Prior to the beginning of the stabilization program the United States Government had given emergency grant aid to Bolivia amounting to $22.6 million in 1955 (of which $14.6 million was in PL 480 agricultural surpluses) and $23 million in 1956. Since the stabilization program has begun the United States Government through the ICA has continued its grant program in the amount of $22.6 million in 1957, $21.5 million in 1958 and about $21 million in 1959. The stabilization program has been in continuous [Typeset Page 77] operation since December 1956 and an International Monetary Fund representative is resident in La Paz.
The stabilization program has been carried out with a considerable degree of success considering the magnitude of the problems and recent political history since 1952. The single rate of exchange has been fairly stable at about 12,000 Bolivianos to the dollar; the cost of living which rose by 178% during the year before the stabilization program began, has increased by only about 20% in the past two years; the government has followed an austerity plan in its expenditures and has made some progress in its credit restrictions. However, the financial situation began to deteriorate again in the middle of 1958 when pressures for wage increases resulted in numerous strikes and higher public expenditures; at the same time public sector financial deficits increased. Early in 1959 a revised [Facsimile Page 5] standby agreement was negotiated with the International Monetary Fund but the Bolivian government has had some difficulty in complying with some of its provisions. The basic difficulty was the government’s unwillingness to discontinue price subsidies in commissaries operated by the nationalized mines, which were creating a heavy financial burden. After considerable negotiation in which the United States Government supported the International Monetary Fund’s position, the commissary price issue was finally resolved and a new standby agreement concluded in May 1959. This standby is still in force.
Under the stabilization agreement of May 1959, Bolivia was given a further drawing of $1.5 million by the International Monetary Fund and to date has drawn $0.2 million of this amount. ICA grant assistance has continued in the amounts indicated above and it is believed that it may be possible to taper off grant aid over the next years. The fundamental problem in Bolivia has been that production of the basic export product, tin, has declined as a result of nationalization of the mines, antiquated equipment, and worker indiscipline, so that foreign exchange earnings have fallen off drastically from a total of $150 million in 1951 to $64 million in 1959. At the same time, weak international markets for non-ferrous minerals have aggravated the problem, efforts to diversify the export economy have been not very successful in view of the political unrest, low level of income, large scale illiteracy, great transportation problems, and the limitations of domestic resources.
COLOMBIA
As a result of excessive imports, heavy government expenditures, and a sharp decline in the price of coffee, the new democratic Government of Colombia which took over in 1957 found that it had inherited accumulated commercial arrearages to foreigners of [Typeset Page 78] $450 million, an inflated budget, and a greatly reduced foreign income. Efforts to renegotiate the commercial arrearages had been made by the previous Rojas Pinilla government but the further decline in coffee income created a burden which the new government believed was too heavy. Therefore, in June 1957 a standby agreement was entered into with the International Monetary Fund which made available Fund drawings of $25 million. Under this standby agreement the Colombian government committed itself to policies which would limit rediscount facilities to private commercial banks, devalue the Colombian peso to a more realistic level, reduce the budgetary deficit, and set aside funds for the liquidation of the commercial arrearages. In July the Eximbank showed its support for this program by granting a credit for $60 million and at about the same time commercial banks in New York made available a credit line of $27 million. Under this program Colombia has been able to liquidate a large part of its commercial arrearages and to reduce its [Facsimile Page 6] imports from about $60 million per month in 1954 through 1956 to a level of about $30 million in 1958.
There have been two renewals of the standby agreement with the International Monetary Fund since the date of the original program. Under these new programs more specific targets on budgetary expenditures, central bank and private bank credit, and other economic indicators have been set. In general Colombia has achieved a considerable degree of success in adhering to its commitments with the International Monetary Fund. The first renewal in May 1958 made available new credits of $78 million from the Eximbank and $25 million from private commercial banks in this country. Under the second renewal in November 1959, Colombia obtained drawing rights of $41 million from the International Monetary Fund and loans of $25 millions from private United States banks and $25 million from the Eximbank. Colombia has managed, despite the reduction in export income of between $580 million to $657 million annually during the period 1953 through 1956 to only $460 million in 1958, to repay a large part of its commercial arrearages and to accumulate a modest amount of international reserves. It is estimated that the overall Colombian payments position has improved by about $300 million since the beginning of the stabilization arrangements. The loans made available by the Eximbank were and are used for export of United States produced equipment to Colombia. In addition, under the authority of Public Law 480, agricultural surpluses valued at $6.5 million (March 1958) and $31.6 million (October 1959) are being supplied to Colombia.
[Typeset Page 79]PARAGUAY
In March 1956 the Paraguayan government made its first real effort to cope with an inflation which had raised the cost of living nine-fold between 1950 and 1956. The Paraguayan currency unit, the Guarani, was devalued to 60 to the dollar from the multiple rates previously existing and a move was made to reduce internal monetary expansion. This program was not successful and in August 1957 a more complete stabilization program was put into effect in cooperation with the International Monetary Fund which made available a standby of $5.5 million. Since then this standby has been twice renewed and now expires in August 1960. To date Paraguay has drawn a net amount of $2.75 million under the International Monetary Fund standby arrangements, making available a total of $2.75 million which can still be drawn.
Under its agreement with the International Monetary Fund Paraguay devalued the guarani to about 12C to the dollar and set up a unified free exchange system. Internal stabilization measures were put into effect involving a limitation on Central Bank advances to the government and the private sector and the curtailment of credit by the commercial banks. As a result of these stabilization policies the rate of monetary expansion [Facsimile Page 7] was reduced from an average of about 70% per annum from 1946 through 1955 to about 20% in 1958 and about 3% for the first nine months of 1959. The cost of living only increased by about 3% in 1958. Production and investment have shown moderate increases since 1957 as compared with the stagnation of the pre-stabilization period. Expert income has increased and there has been a modest improvement in the foreign exchange position of the country. Gold and dollar reserves which were virtually non-existent in 1956 are now at about $3 million. In the past few months, however, there has been some deterioration in the internal financial situation owing to an undue expansion of Central Bank credit. An International Monetary Fund Mission is now in Paraguay discussing this matter with Paraguayan officials in an effort to bring that government to closer conformity with the stabilization objectives.
The United States Government has not participated in this program directly on a financial basis although it has made available economic development credits through the Development Loan Fund. Under Public Law 480, Paraguay has received $2.9 million of agricultural surpluses by an agreement signed in May 1956.