311. Telegram From the Embassy in Peru to the Department of State1
695. From Mann. Following are my first reactions to latest Colombian exchange crisis. Would appreciate views of Ambassador Oliver and Department. Costanzo2 leaves tonight for Washington after first meeting with Minister Calle scheduled to take place this afternoon. He will bring to Department details our discussion here.
First, it seems to me first question we must ask ourselves is whether, if GOC makes no change in its exchange policy, disbursement of $45 million would stabilize the situation. On basis of info available to me I doubt very much that it would. It was, I am told, recognized [Page 679]in 1963 that the maintenance of two exchange rate system was difficult at best and would require a high level of confidence in the peso to maintain. I understand that the then Minister of Finance, Carlos Sanz de Santamaria, refused at that time to move to a single rate, or some other more adequate system, but agreed to reconsider if exchange loss should exceed $30 million in 1964. It seems clear that the weak political position of President Valencia, the recent capital flights, and the relatively heavy recent foreign exchange losses present us with a very different situation from the one we faced in 1963 and when we signed the 1964 aid program.
Instead of confidence, there is an obvious lack of confidence in the ability of the government to avoid devaluation. Purchase and sales of exchange this week should tell us more. But I understand that outstanding import licenses total about $500 million which can be presented for payment at the nine-to-one rate at any time. All of this suggests that unless effective corrective action is taken first, the disbursements would be quickly wasted in a futile effort to maintain a nine-to-one import rate while price rises over past two years suggest it should be at least closer to thirteen-to-one. This kind of a futile exercise would presumably not promote either political stability or economic progress.
- Second, there is the question of whether we are obligated by the loan agreement to make the disbursement, having in mind that Colombian performance has been relatively good on the self-help measures specified in the agreements and that there is no agreement on exchange rate. It would seem to me that marine insurance issue gives us an out. Perhaps the attitude of Congress re taxes gives us another peg but I assume this would be more relevant to 1965 performance. Do our program loan agreements contain a general escape clause which can be used where conditions have changed to such an extent to make it impossible to achieve its purpose? If not, it seems to me they should in the future.
- Third, is the question of whether the U.S. should seek to avoid the political onus for the urgently needed exchange reforms. This is a luxury I don’t think we can afford. However, I understand the IMF is willing to return a team to make suggestions about corrective action. The IMF rather than the U.S. should suggest the precise corrective action needed. I understand there are a number of possibilities, some of which might be more acceptable to Valencia than others. In this connection, is it correct that one of principal political problems is public promise of Valencia not to devalue plus belief that movement from nine-to-one rate would not only be a partial devaluation but would raise food costs as well? Would it be feasible to use PL 480 to help in food cost front?
Finally, it seems to me both Colombian and U.S. interests would be best served by urging that corrective action in exchange rate be taken forthwith and that disbursements of our aid be used to support GOC effort. For this we could stick on marine insurance issue as Ambassador Oliver suggests, perhaps with whatever adjustments are necessary on issue of forward procurement.
- Source: National Archives and Records Administration, RG 59, Central Files 1964–66, FN 1 COL. Confidential; Immediate. Repeated to Bogotá. Passed to the White House. Mann was in Lima to attend the third annual meeting of the Inter-American Economic and Social Council (ECOSOC).↩
- Henry J. Costanzo, director of the Office of Latin America, Department of the Treasury.↩
- In the meeting with Mann on December 9, Calle acknowledged that resolute action was necessary not only to address the exchange rate but also to adjust much of the government’s economic program. In return, Mann agreed to expedite the 1964 program loan by resolving the outstanding issues of marine insurance and forward procurement. Mann believed there was no alternative and step was “essential part of measures needed to keep Colombian economy viable.” (Telegram 698 from Lima, December 10; National Archives and Records Administration, RG 59, Central Files 1964–66, FN 10 PERU/IMF) Although Valencia continued to resist devaluation, the two sides eventually agreed on a formula to resolve their legal differences, thereby freeing $35 million of the program loan by December 31. (Memorandum from Sayre to Bundy, December 21; Johnson Library, National Security File, Country File, Colombia, Vol. I, 12/63–7/65)↩
- No response has been found.↩