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

VE–39. Memorandum from the Deputy Assistant Secretary of State for Inter-American Affair (Mallory) to the Under Secretary of State (Dillon)¹

Undated

SUBJECT

• Briefing Memo: Venezuela’s Current Financial Situation

Venezuela has recently developed serious financial difficulties and is, for the first time in recent history, actively seeking assistance from the U.S. and international financial agencies. An IMF Mission is now in Caracas to consult with the Government of Venezuela on a possible standby credit agreement. At the same time, the Government of Venezuela is negotiating with a group of U.S. private banks for a possible $200 million credit and may seek an interim, gold-backed loan of $150 million from the Federal Reserve Bank of New York.

In the event that any discussion of these matters should be initiated by the Venezuelan representatives at San Salvador, you may find the following information helpful.

Background

Between 1951 and 1955 Venezuela’s official gold and dollar reserves increased by about $150 million. In 1956 they jumped by over $400 million and in 1957 by $500 million more—the results of Suez and the large-scale leasing of new oil concessions. At the end of 1957 (which roughly coincided with the end of the Perez Jimenez regime) official reserves stood at $1,446 million, an amount exceeded by only six other countries in the world.

This favorable trend changed early in 1958, since when there has been a steady decline in reserves continuing up to the present time. The loss amounted to $400 million in 1958, $342 million in 1959, and reserves stood at $682 million on January 28, 1960. Practically all of this was in the gold stock, which the government was extremely reluctant to deplete for reasons of public confidence.

Though many details are lacking, the main outlines of the factors responsible for this deterioration in Venezuela’s balance of payments position are clear enough. The volume of imports, which increased very sharply in 1957 in response to the stimulus afforded by the record exports and massive investments of 1956–57, has continued at a heavy rate, even though new oil investments have been sharply contracted, outward earnings remittances have reached very high levels, and exports have receded. Concurrently, the previous capital inflow has apparently turned into a net outflow, principally for two reasons: payments on the short- and medium-term foreign debt incurred under Perez Jimenez, and capital flight. Finally, and perhaps most important, imports have been maintained and capital flight has been stimulated by expansionary fiscal and credit policies.

Along with the cumulative drain on the central bank’s foreign exchange reserves, a series of grossly imbalanced federal budgets, largely attributable to efforts to carry on extensive public works and development programs, have depleted treasury holdings and created a serious fiscal problem. Treasury holdings are currently less than $100 million. Although purportedly determined to balance the federal budget next year, the Government of Venezuela requires some $300 million over and above anticipated revenues to meet the current, FY 60 budget with its politically essential works programs. The Venezuelan constitution prohibits treasury borrowing from the central bank and the tight domestic credit situation precludes heavy borrowing from domestic commercial banks, so that recourse must be had to foreign sources for the needed funds.

Current Status

The balance of payments problem is being dealt with in part by various measures to curtail imports of less essential goods through quantitative restrictions and prohibitive duties, and discourage the outflow of nervous, flight capital, while at the same time seeking to encourage new capital inflow for investment purposes. It is as yet too early to appraise the adequacy of these measures, but they are already ameliorating the drain of reserves to some extent. It was necessary, however, for the central bank to sell some $65 million worth of gold in the fall of 1959. Remaining gold reserves are probably an adequate bulwark against any immediate payment crisis but large scale gold sales are considered undesirable by Venezuela because of the anticipated psychological reaction.

Rather than accentuate her unemployment problems by further curtailment of public works programs to permit a balanced budget, the Government of Venezuela hopes to obtain foreign credits of about $300 million. The first $100 million of this was obtained in November, 1959 by sale of tax anticipation certificates to the foreign oil companies operating in Venezuela. An informal IMF consultation in December served to advise the Government of Venezuela on certain measures recommended to remedy the financial problems. On February 1 an IMF Mission arrived in Caracas to begin two weeks of talks looking to a stand-by agreement. Without awaiting the outcome of these talks, a group of U.S. private banks have informally agreed to extend $200 million in credits to the Government of Venezuela, although the terms are not yet known to the Department. To cover the interim before these credits can be formally arranged, it is expected that the Federal Reserve Bank of New York will respond favorably to a Venezuelan request for a $150 million, 90-day, gold collateral loan.

A factor which bears on the future stability of Venezuela, both political and economic, is the still unsettled petroleum industry-labor contract negotiations.

Recommended Position

Bearing in mind Venezuela’s hitherto aloof attitude toward the International Monetary Fund, you might wish to express satisfaction with the manner in which Venezuela is now seeking the advice and guidance of the Fund and the serious efforts the Government is making to remedy its financial problems before they attain crisis proportions and while there is still room for maneuver.

1. Source: Department of State, Conference Files, Lot 64 D 559, CF 1590. Confidential. Drafted by Ingersoll on February 2, 1960, and concurred in by John Parke Young, Chief of the International Finance Division, Bureau of Economic Affairs.