483. Memorandum From the President’s Special Assistant (Rostow) to President Johnson 1

SUBJECT

  • Program Loan for Peru

The attached memoranda contain a request by Bill Gaud for authorization to negotiate a $40 million program loan with Peru, and concurrences by Charlie Schultze and Joe Fowler.2

Need for the Loan. Since he took office in 1963, President Belaunde has pressed a development program targeted largely toward opening the interior of Peru. Public investment has outstripped revenues and led to inflationary pressures and a foreign exchange drain which now threaten financial stability. The program loan—part of a joint program worked out with the IBRD and the IMF totalling $175 million—is designed to permit Belaunde to correct his financial difficulties while continuing a reasonable development effort.

Conditions for the Loan. Belaunde’s budgetary deficit for the year starting July 1, 1967 is expected to run up to $186 million if remedial action is not taken. Exchange reserves dropped nearly $30 million during the first quarter of 1967.

The proposed loan would be negotiated if:

  • —The Peruvian Congress authorizes new revenue measures which will net $116 million.
  • —The government cuts back expenditures by $15 million.
  • Belaunde turns down the military’s bid to spend some $30 million on supersonic jet aircraft.
  • —Peru negotiates a satisfactory standby agreement with the IMF.

These conditions involve tough decisions from which Belaunde has until recently shied away. But on May 8 he asked the Congress for authority to raise revenues and cut expenditures in the amounts indicated above. The loan will be contingent on his getting this authority and accepting the other conditions.

The loan would be disbursed in three installments, each contingent on compliance with the terms agreed upon.

Funding the Loan. Funds are presently available from the FY 1967 appropriation to cover the loan. If there is a long delay in the negotiations it will have to be funded in FY 1968.

Other related considerations. Together with Frei, Lleras and Leoni, Belaunde represents a new generation of political leaders of democratic bent, deeply interested in modernizing their countries. We have a stake in seeing Belaunde and his program succeed.

Belaunde has stuck faithfully to his promise not to impair the position of the International Petroleum Company. IPC continues to operate under the same conditions that existed when Belaunde took office. Negotiations between IPC and government continue. Differences have been narrowed, but a final settlement has not been reached.

In the past we have had trouble with Peru over seizure of our tuna boats. There have been no recent incidents. We have proposed negotiations on a conservation agreement and are awaiting Peru’s response.3

Recommendation

I joined Fowler and Schultze in recommending authorization to negotiate the loan subject to the conditions stated and to further consultation with you prior to signature of the loan agreement.

Walt

Approve

Disapprove

See me4

  1. Source: Johnson Library, National Security File, Country File, Peru, Vol. II, 1/66–10/67. Confidential.
  2. Attached but none printed.
  3. On October 2, 1966, three U.S.-owned tuna clippers were detained for operating within the 200-mile fisheries jurisdiction claimed by Peru. The boats were released on October 6. Memoranda on the tuna boat incident from Rostow to the President, October 4, 6, and 7, are in the Johnson Library, National Security File, Country File, Peru, 1/66–10/67. Documentation on the incident and the controversy over the legal limit of Peru’s territorial waters is in the National Archives and Records Administration, RG 59, Central Files 1967–69, POL 33–4 PERU.
  4. The President checked this option and wrote: “What does [Lincoln] Gordon & [Sol] Linowitz do or say on these loans? They should be in on them. L.”