III! 'ii¥ H#' ttl .I UJ . II " i:q; III 6IiI i Ii I It :, I I, I :i;, fi11!S ; II;;. IHfL4t4 I . :

I This report is restricted to use within the Bank. I

RESTRICTED

No. E-18Za

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

Economic Department Prepared by: Harold Larsen

THE ECONOMY OF PERU

October 12, 1951

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Area

Population 1940 195q,

Currency

National Income 1~47

Exoorts f.o.b. Imports c.i.f. Gold and. Foreign Exchan

Gross all banks I.F.S~ Net! Central Bank

Government Revenue ExQenditure

Money Supply

Wholesale Erica s. all goods Cost of livinG index

PERU

BASIC STATIST1CS

482, 300 square~ lIliles

6.7 . mill ion . 8.1 million

No official parity; rate fluctuates around 15 soles to the U.S o dollar

1 sol ~ 6.67 cents 1 million soles • uS$ 66.667

5,450 million soles (US$ 838 million) ($112 per head.)

156.8 167.7

58.6 12.8

1021 1051

1163

396 337

~ 1950 (Million US$)

151.6 194.1 167.1 187.1

56.8 68.9 10.2 24.6

(Million soles)

1433 1390

1901 2219

(1931 a: 100)

553 645 387 433

80.4 45.4

2880

4753 72

a/31/SI No.580

PERU POPULATION AND NATIONAL INCOME PER CAPITA (SOLES PER PERSON

(MILLIONS OF PERSONS) AT 1949 PRICES) 10~--~--~--~--~--~--~--,---,---,---,---,---~--,1200

YEARLY PER CAPITA

8 ........ - -- 'POPULATION

1000 NATIONAL INCOME~ " .... - - __

,.",.~ ~ ... --...... '."",--

6 800 1940 1941 1942 1943 1944 1945 1946 1947 1948 1949 1950 1951 1952

WHEAT AVAILABILITY (THOUSANDS OF METRIC TONS)

500~--~--~~--~--~--~--~--~~--~--~--~--.---~500

400

300

200

100

YEARL.Y IMPORTS OF

WHEAT AND WHEAT FLOUR

WHEAT PRODUCTION

400

300

200

100

o 0 1939 1940 1941 19421943 1944 1945 1946 1947 1948 1949 1950 1951 1952

CEMENT PRODUCTION: VOLUME l THOUSANDS OF METRIC TONS)

400~~--~~~~--~~--~~--~--~~--~~--~--~~400 YEARLY

300 300

200 200

100 100

o 0 '35 ·36 '37 '38 '39 '40 t~1 '42 '43 '44 '45 '46 '47 '48 '49 '50 '51

MONEY SUPPLY AND COST OF LIVING (INDEX, 1937 = 100)

1500 ~~~~~~~~~~~~~~~~~~~~~~~~~1500

1000

500

END OF PERIOD

...... .----­---

MONEY SUPPLY

1000

500

o ~~LLLU~~LLLUUU~~LU~~LLLU~~~~WWUO

'38 '46 '48 '50 '52 J 0 J 0 J 0 J 0 1949 1950 1951 1952

I.B.R.D. - Economic Dept.

8/31/51 No.581

PERU REVENUES AND EXPENDITURES (BILLIONS OF SOLES)

3.---,---~---.---.----.---.----.---.----.---.----.---.---.3 YEARLY

2

-

PUBLIC DEBT ~ (END OF PERIOO: 2

1940 1941 1942 1943 1944 1945 1946 1947 1948 1949 1950 1951 1952 * Special account data for 1940-44 not available. (8udget)

PETROLEUM EXPORTS (MILLIONS OF METRIC TONS)

2 ....----,,...--, ., YEARLY

" "

If-

o '0 1935-39 ~ '42 '44 '46 '48 '50 '52 AVERAGE

TOTAL EXPORTS: VOLUME PER CAPITA ( KILOGRAMS)

SUGAR, COTTON, AND COPPER EXPORTS (THOUSANDS OF METRIC TONS)

~~~~~~~~~~400

f- .-- -

,f\\ r""\ ,/"1\ YEARLY

, I \.; ""'- 300

'- .. _-

1935-39 '40 AVERAGE

" , \,' SUGAR 200

100

'42 '44 '46 '48 '50 '5P

500 .--.--.--.--~--~-.--~--~~--.-~---.--~~--~~500 YEARLY

400 400

300 300

200 200

100 100 1935 '36 '37 '38 '39 '40 '41 '42 '43 '44 '45 '46 '47 '48 '49 '50 1951

DISTRIBUTION OF EXTERNAL TRADE (MILLIONS OF U.S. DOLLARS)

200.---~~--------~ ,----------------,200 TOTAL WESTERN HEMISPHERE EUROPE AND REST OF

WORLD

150

100

50

1948 1949 1950 1951

OTHER WESTERN

HEMISPHERE

1948 1949 1950 1951

150

1948 1949 1950 1951

1.8.R.D. - Economic Dept.

S/31/51 No. 582

BALANCE OF PAYMENTS (MILLIONS OF U.S.DOLLARS)

0 50 1938

RECEIPTS PAYMENTS

1947

RECEIPTS PAYMENTS

1948 RECEIPTS

PAYMENTS

1949* RECEIPTS· PAYMENTS

1950 RECEIPTS PAYMENTS

1951 RECEIPTS PAYMENTS

PERU

100 150 200 250

NONMONETARY GOLD EXPORTS

* Published data for 1949 balance of payments and foreign exchange holdings do not ogree.

GOLD AND FOREIGN EXCHANGE ASSETS (MILLIONS OF U. S. DOLLARS)

100 ~~~~~~~~~~~~~~~~~~~~IOO

50

END OF PERIOD

.' .. ' .......

J.i~~i[(·fJ~;~ <ntiflNdi ~:t, .... (,.:~.::~::it!,!t; II1t~tf~ .?;:;:;Vo~tiHN:~~ic~A'N·GE····.k~·gE¥~·\~·:)t·t50CX'X

GOLD

50

l~~)~;~j~t~}it~*~)~)'~:::~'~~::~~~:~:~~/~~0~~~'~~~~~:::i'~~~"~:'~:~~~~~~~~~~ o 0 '38 '46 '48 '50 '52 J 0 J 0 J 0 J 0

1949 1950 1951 1952

I.B. R.D. - Economic Dept.

<€l =

512,401 )

lot,11 I = , ....... dJ 45-4.2n

6-1J,1:15 @ 610)50

292, •• 5 Huancaveliea Hlolanuco 301.095 Huanuco Ie. 140,17] le.

Ii Jun:" .20.US Huanuyo 5 Lt libort.d 446,751 Trufilto 3 Lambayeque In,'''' Chiel.yo 7 Lima '''',512 lima

23 Loreto 340,527 IquitM 22 M.d,. d. 0; .. %S,18! Pto. M.ldonado 10 Moquegu. i.,SiO MoqU8glJa

~ 15 '.ICO t2'1.l'6 Cerro de Pasco 2 Piur. 4n,114 Piurl1

~~ 21 Pvno 101.4049 Puno I] S.n M .. rtfn 111,103 Moyobamo.

~~ II T .... ,ft,'" Tacna I T .... boo 29,011 Tumbes

CONTENTS

Page

~ AlID CONCLUSlm~S • • • • • • • • • • • • • • • •• i

I. BESGURCES Aim INCOME . . . . . . . .. .. . . .. . .. . . . .

III.

Agr' 1 cu.l t 1l.I"e • • • • • • • • • .. ., • • • • it .. • • • • 2 Vlinef'al s .......................... 4 Petroleum • • • • • • • • • • • ~ • • • • • • • • •• 7 liianuiacturing • • • • • • • • • • • • • • • • • • • • 8 Transport •••.••••••••.•••• . .. • .., 9

nW'.l1JBNAL Fn!ANCE

Government Finance • , • , • • • • • • • • • ., 9 Honey Supply and Prices • • • • • • • • • • • • • •• 13

IV. EXTERNAL TRADE AND FlNMTCE

Foreign Trade • • • • • • • • • • • • • • •• 14 Exchange Rates and Policies • • • • • • • • • • • •• 19 External Debt .......,............ 20 Credi tworthiness • • • • • • • • • • • • • • • • • •• 22

StJM1.1ARY AND CONCLUSIONS

Peru has a basically agricultural econorncr; agriculture employs almost tvJo-thirds of the working population. Food crops are planted on 85% of the total aree under cultivation and the balance is given over to sugar a~d cotton. Next in importance to the economy are the mineral re­sources, particularly lead, copper and petrole~~. Manufacturing, which has traditionally played a small part in Peru's economic life, has expanded fairly rapidly in the postHar period. Ey 1949 domestic production supplied 66% of durable goods purchased by consumers compared with h3% in 1942.-

Approximately one-half of the steadily growing population (which in­creased 20% betvleen 1940 and 195D) lives in very primitive conditions. The economy suffers in all sectors from lack of equipment, especially transport and communications facilities, and other forms of basic investment. There is little immediate prospect of very substantially increased investment from Peruvian sources because of the low national income and the consequent lack of savings.

The Peruvian budget has traditionally shovn a deficit which has been covered by internal credit operations, chtefly vlith the Central Bank and earlier by overseas borrowings which have stopped since the depression of the thirties. Recen tly tax yields have increased remarkably, reaul ting in aD overall budget surplus in 1949 and 1950. Budget receipts for 1950 ex­pressed in 1939 soles Here 56% higher than those of 1939.

Government revenues are now estimated at about 15% of national in­come. If properly utilized, these funds could adequatelY support signifi­ca.nt development activities. A high proportion of current budgetary ex­pend~tures is devoted to payment of civil and military personnel and to the purchase of consumption goods. Expenditures have been relatively low on factors important to economic development such as transport and irrigation.

In Peru's foreign trade, exports are primarily sugar and cotton (al­most 50% of postwar exports by val ue), and minerals (3)% by val. ue) of which petroleum, copper and lead are the most important. Her chief imports are food products, machinery, heavy durable goods and some textiles and chemi­cals. Peru t s overs.U trade has tended to be in balance , with deficits ,d th the Uestern Hemisphere and sU!'pluses in Europe tmose currencies are, of course, inconvertible. This pattern will probably continue; the problem is that roost of Per~rs .present debt service is in dollars. However, Peru has shovm in the past an ability to restrain imports to match her availabili­ties of foreign exchange.

Perufs credit?Jorthiness depends more upon the possible effects of future investment than upon the present balsnce of payments position. On the basis of present trends in her economy,., Peru should be able to assume addi­tional dollar debt service of about $2 million an.nuall.y~ provided that (a) internal financial policies can control possible inflation" and (b) the development. program wUl promote production of export goods and of import re­placements.' These measures would prevent the deterioration of Peru's present balance of p~ent s position.

Developmental policies should encourage private investment in mining (including petroleum) and in industry, while Government investment should be directed primarily towards agriculture and transport •. With a few exceptions, electric power supplies are adequate for the time being.' but the private utility compsny serv~ng the ~ima-Callao area should be encouraged to continue expanding l. ts capacity.

While Peru might be able to absorb advantageously a somewhat higher leve). of borrowing than suggested by a. service of $2 mUlion annually, at pre­sent this would be justifiable only if repayment Vlere in non ... dollar curren­cies.

I, BESOURCES AND INCOME

Peru. is divided geographically into three distinct regions: the desert coastal plain; the Sierra or Andean mountains; and the Mc:~tana or Amazonian jungle, Each presents different problc;:ms. The coast depends en­tirely upon irrigation. and is in reality an archipelago of islands separated by desert instead of sea, The Sierra is similarly a region of' discontinuous settlement, this time in mountain valleys. The extensive ~Iontana, almost . two .... thirds of the land area of Peru. is still a region of superficial trop! .... cal e~loitation.

Population is steadily growing. Between 1940 and 1950 the total in­crease was 2Cf}, from6.7 million in 1940 to 8.1 million in 1950. Perhaps half of the Peruvian people are of full Indian blood. while another 40% are of various blood mixtures in "'hich the mesti zo (",hi te-Indj.an) predominate. Only about 10;h of the population is of pure European descent.

At the 1940 census more than 6rJ;' of the Peruvian people 1i ved at alti­tudes of over 6,000 feet, ~hile only 25% lived in the coastal river valleys. Yet. it is the coast which is the most highly developed. possessing all export agriculture~ the greater part of commercial food production, and the largest proportion of manufacturing. The coastal region is ""holly wi thin the monetary economy. while large parts of the highlan,is are still upon its fringe~ Out­side mining; which in total affects the way of life of only a hand:~ul of i,-ork:­ing people. highland production has not so far supplied much to the rest of the country beyond a small flovl of foodstuffs to the coast and some minor exports such as wool. It is not surprising tllat there is a steady gain of coastal population from the highlands. 'I'he million or so people east of the .An;!os are upon the frontiers of a modern economy. and many of them stUl wholly outside monetary economy.

These differences must be taken into account when consm ering the basic statistics. Estimates of Peruvian national income and accounts have been made for the period 1944-1947 (and preliminary estimates for 1948 and 1949). but by me'chods '",hich limit their international com~ rability. ~ey indicate an average per capita income in 1947 of 725 soles, or US$ 112 at the then official rate. This average figul'e is useful mainly as /;in initial start­ing point for appraisal, It is not really representative owing to marked dif­ferences in personal and geographical income distribution,· and associated dif­ferences in the purchasing power of money for different people and in different regions.

~be coastal region, both urban a~d rural, is relatively highly de­veloped. Inhabited by only one ... fo11rth of the population, it produces about

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one-half of total national income. Average coastal income per capita was probably around the uS$ 220 mark in 1941. The half of the Peruvian popula­tion which lives in a primitive economy bad sometiling like US$ 30 per capita in income in that year, while tbe 25% 1n the non-coastal, non-primitive economy probably averaged around US$ 170.

Area

Coast Primitive Other

~otals

ESTIMmD NATIONAL INCOME AND SAVUJ'GS; 1947 (soles converted at 6.50)

Population (million)

1*-9 30 8 1 0 8

7.5

, . per head

Income Net~~tentialities total per cent. total, ,

(U5$) (US$ million) . (US$ million)

220 30

170

112

419 114 305

12.5 nil 9

9.5

52

28 "

80

!I Assumed as plausible possibilities. ,

Maximum net savine; fromthe 1947 Peruvian national income could not have ex­ceeded the equivalent of US$ 80 to 100 million, and was probably considerably less. It is probable that no more than the equivalent of US$ 40-50 million in soles could be mobilized from domestic resources in 1947 for total new productive investment. including private, since part of the savings is di­rected to social and military pu~ses such as construction of schools, hos­pitals, barracks, etc.

II.. PRODUCTIOl~ AND llJVESTMENT

Agriculture Y

Agricul ture is stUl the princ1pal occupation of the Peruvian people, accounting for almost t''lo-thirds of the economicc-tlly active population. In 1949, agriculture end livestock contributed 35% to gross national product. compared with ljf; for manufacturing including handicrafts.

Available statistics indicate that agricultural production has not kept pace 1?'Jith population i~ rease. Over the past fifteen years to.tal food production probably increased by some 2C!fb while population expanded 33th, and since during the seme period the real value of total exports per capita has

11 A technical "Report upon the Agricultural Economy of Peru .... from t'I,hich the main conclusions of tt.J.S Chapter have been taken, is available from the EconomiC Department upon request.

-3-

declined somewhat, the possibility of obtaining food requirements through im­ports was restricted. In view of the many calls upon foreign exchange avail­abilities which econolllic development rill necessitate. it is important that no opportunity for efficient increase of agricultural output be neglected~ both to increase exports and to provide food 1J!1hich would otherwise have to be imported.

A total of about 1,150,OUO hectares were under crop in PeI'\l in 1950 .. -of which 127.000 hectares were under cotton and 51,000 hectares under sugar ... Both these staple export crops are grown in irrigated coastal valleys. Sugar production is l:>,.igbly efficient, but little immedia1ie expansion is possible in cane production owing to a lack of available irrigable land in the v.icinity of the mills. The exportable surplus of sugar varies from almost 300,,000 to 350,000 metric tons annually, of which only some 10% goes to the United States .. Latin America takes about two-,thirds of Peru's sugar expoTts, with Chile the main market. It is not expected that sugar exports will ',increase. signifi- . cently in volume, since any feasible production increase is likely to be ab­sOTbed by growing domestic consumption,

The area used for cotton production is InOrl3 variable than the sugar area, but is in direct competition for irrigated land with food crops. There. appear. however, to be possibilities for increasing production without neces­sarily enlargj,ng the crop area. Much can be done to lessen the dangers of seasonal water shor tage by improving irrigGtion, by the wider use of insecti­cides and perr~ps of fertilizers. AlthOUbh some part of increased production will be needed to sUpply the ~ov;ing domestic market, present expoJ'ts of 45,000 to 55,000 metric tons could be maintained without great effort. Ex ..... ports are likely to continue to find tneir main markets in the United Kingdom. Continental Europe and sterling countries of Asia; exports to the United States are limited by quota.

About 975.000 hecteres were under food crops in 1950. The tqtal irri­gated area is estimated at about 500,000 hectares, so that about 325,000 .hec- , tares, or almost twice the cotton and sugar area, is irrigated for food crops. Farmers are typically small tenants rather than owners; some 80% of holdings on the coast and 65% in the hig.'1lands are less than five hectares. In the medium range which may be suitable for owner~operated mechanical equipment, about 10% of holdings on the coast end 17% in the highlands are between 11 and 100 hectares. Not included in these figures are the 137,694 Indian farm units, all believed to be under five hectares, distributed among 1,,322 Iteom­munities" inhabited by one million Indians.

It is possible to increase food production, but quick and spectacular resUlts are improbable. Measures and policies which could bear fruit rela .. tively quickly V1culd be directed towards improving cultivation practices" in­cluding better water utilization ~n irrigated areas, and the use of fertilizers~ and insecticides. and more and better farm tools and equipment.. On both very small and very large r..oldings it \'7ill take time before orners and fa;rmers realize that traditional methods can advantageousLy be .changed. .Among snalJ. and medium holdings, the diffusion of improved technical practices will be facilitated by ~intenSlce and if possible enlargement of the extension and demonstration work of agenCies like Servicio Cooperativo Interamericano de

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Prodl.lccion de Alimentus (SCIPA). Agricultural machinery pools. and adequate facilitie s for increased owner-operation of mechanical equipment, particularly upon medium holdings, is obviously important. A substantial beginning has been made in this field. The products which appear to merit special attention are wheat, meat and dairy products, particularly since consumption of these items is heavier in the growing urban population than in the countryside. Agricul­tural development will be hampered if investment in "social overhead lf capital. lags, particularly transportation anel f;ltorage facilities. Without adequate transport and marketingt the incentives for the ,,'Orking f&1ller to increase his cash crops will be weakened and improved techniques, involving larger cash outlays. will seem unattractive to him.

At the same time, agricultural change will influence, and be partly dependent 1,lpon, social change. At present the highlands provide an important source of manpower for the coaste~ economy. The timing of peak agricultural labor requirements is not the sarr.e on the coast as in the hj,.gblands. Thus migratory t'lorkers, largely Indian, can Ire et seasonal needs in both areas, or can provide casual. construction or general labor on the coast during periods dependent upon the highland agricultural season. A migratory worker's saving from his coastal wage may at present represent a highland family's whole money income. One initial result of coastal. farm mechanization miEPt be to reduce highland money income t and it would therefore be desirable if simultaneously opportunity were afforded for highland farmers to expand their cash crops. Conversely, the labor position influences mechanization. Many large holdings. particularly in the highlands, sppear to be under ... utilized. They are not able to obtain rural workers upon customary terms to fill their labor reqUire­ments "',)ecause the workers prefer to till their own plots rather than work for the landlords~ Yet mechanization of large holdings appears at present to be more costly than customary labor service, while ~ithout mechanization or more intensive use of labor, production increase may lag. The action of large holders regarding mechmization both on the coast and in the highlands may determine the future relative pressure of agricuJ.t. ural population upon re­sources in the highland valleys. It is difficult to see under these circum­stances how higher cash wages to rural workers in some highland areas could be avoid19d. In fact, this might well be preferable both from the community and frorothe highland farm owner's pOint of view.

Minerals

Peru's mineral production has undergone a major transformation over the past thirty years. In the twenties. the major emphasis in production was on copper (carrying high gold and silver values as well) t and vanadium. There was also a limited production of lead and dnc. The two dominant firms were Cerro de Pasco Company and the Vanadium Corporation of America. Because the copper ores w~re so rich in precious metals, mining methods were relatively simple and little or no attempt was made to recover such smelter by-products as antimony or arsenic. Lead and zinc proQ.uctior: were neglected in favor of copper largely because of the higher precious metal values in the copper ores,. Vanadium Corporation enjoyed a virtual world monopoly of an alloying elemen t which was just beginning to find new uses,

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During the depression of the thirties, the sharp fall in silver and copper prices caused operators to seek profitable means of exploiting Peru's lead and zinc ores and encouraged Cerro de Pasco to make efforts to recover more by-products in smelting. Tile leaner vanadium ores were as yet con­sidered unprofitable.

War demands for lead and zinc encouraged lead mines to install flota­tion units to recover zinc hitherto discarded as waste and encouraged mining of ores more for their base rather than precious metal content. As a result lead and zinc production. particularly zinc, rose relative to silver. A emall. plant Was erected to treat arsenic accumulations and reCO"JerJ of bismuth and antimony was increased~ Under wartime pressure a plant to treat low-grade vanadium ores was also financed by the U.S. GoverIl!llent, which was later sold to Vanadium Corporation. The bulk of Vanadium's current output is now from low-grade ores, since the old rich mine is virtualJ;y exhausted.

These trends have continued in the postwar period as indtcated by the fact that lead and zinc output reached new highs in 1949. while output of copper, gold and silver is below wartime peaks.

PEW-MINERAL Ou:J.:PUT n:r SELECTED Y'.ill.ARS

.i.~jo-);1 _ v,(:iJ. 1~t1dt..:

Commodity Unit average quantity· {year) 121:7 1948 1949 1~0

Copper ·000 MT ~5.6 44.0 (1940) 22.4 19~1 28.0 2:(.9 Lead If 4_'fp/ 53.7 (l945) 45.8 48.5 65.4 61.1 ZiQ.c tr 17 .. a 61.2 (1945) 58.2 58.8 71~5 13.9

Antimony M~ 1,000 2,472 (194.3) 1,283 1,636 730 1,000 Arsenic If

2~ . 6t~00 (l944) 608 1,011 500 n.a.

Bismuth It

ltJ~ (1943) 237 253 216 n.a. Vanadium If fA6 (1940) 437 5ll 456 n.a.

Gold 1000 o~ 222.6 285.2 (1941~ 116.0 111.2 112.3 125.4 Silver II 19,181 19.916 (1940 10,783 9,288 10,609 13.470

, .

~ Estimated.

Source: Minerals Yee:rbcoKs through 1949 and American Yearbook of Metal Sta­tistics for 1950.

The trend towards increased production of lead and zinc is likely to continue, since Peru's as yet untapped resources are largely in these minerals. Among the promising projects in this field are the vast lead-zinc reserves at Cerro de Pasco, and the new American Smelting and Refining Company projeot at Chllete wllich is scheduled to begin producing in 1952. It is also probable that the electro~tic zinc plants of Cerro de Pasco, when completed, ,may in­crease production of zinc concentrates at Cerro and perhaps at other mines at better prices, At pre$ent, transport costs and high iron content make zinc

.. 6-

concentrate output at some mines relatively unprofitable except in re riodsof boom prices.

In copper, an American Smelting and Refining subsic.iary is engaged in investigating the Toquepala deposit in southern Peru with a view to erecting a plant to treat 10,000 tons of ore per day. If investigations indicate this project feasible, the copper output of Peru coUld be more than doubled in five to seven years.

From the foregoing it is evident that from a physical standpoint; Peru's non-ferrous metals output coUld be increased substantially at competi­tive prices. The crucial question lies in the investment climate, the terms and conditions which private investors are ab~e to negptiEte with the Peruvian Government for transfer of earnings outside Peru. Until mid-1950 the outlook was unfavorable. The experience of some firms had caused at least one large mining company to abandon a project in recent years, 'vhile another delayed making further investments in the hope of securing better terms in the future. The revision of the mining code in 1950 and the establish..'Ilent of a free market for exchange has greatly improved the outlook; the increased. demand for metals and minerrus resulting frolllthe Korean incident should accelerate such investments.

ir.hile Peru's economy is not so heavily dependent on a single commodity as Bolivia, Chile or Cuba, mineral ~xports constitute a substantial proportion of Perurs trade (28% L~ 1948 and 32% in 1949),

The value of mineral exports (including all gold and silver) was esti­mated at $46 million in 1948 and $50 million in 1949. A factor whiCh will raise the value of Peruvian metal exports in future years is the expected in­crease in value of zinc exports, as zinc smelting capacity is expanded from the present pilot plant stage of about 1,000 tons per year to an ultimate out­put of perhaps 40,000-50,000 tons per year. If the zinc ,~orts in 1949 had been in refined form rather than concentrates, the same quantity of contained metal 'V'Tould have had a value of $15-16 million as against an estimated value of $8 million.

Over the ne~ decade or twO', it is likely that the volume of Pem's minerDl exports may increase 50% or more, resulting in metollic exports of $75 million or more annually (at 1949 prices) provided expanSion plans now prOjected are actually carried out. Virtually all the coppel.~ and lead concentrates and much of the refined copper and lead are customarilY sold in the U.S. market, as are all the vanadium ores. The zinc concentrates are marketed in a number of countries including Canada. U.S.A., Belgium and other continental countries.' Only small quantities of refired copper and lead, and eventually zinc, are marketed in Latin America and in 1!Jestern Europe. ConsutrIption in Peru is small and accounts for less than 10)0 of production in most years.. It appears quite unlj,kely that in the future Peru will find it necessary to merket more than a small pr-.rt of its mineral eJq)orts outside the Western hemisphere, although in the first half of 1951 copper exports were diverted to other market~ because of more favorable prl.ces.

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;fetroleum

Peru has had a long history of petroleum production.. It began in 1896, eleven years Defore Argentina .• the next South American COuntl'y to begin production on a commercial scale. Not until 1924 did Peru relinquish to Vene-'· zuela its position as the leading South American producer. In the next few years it was outstripped by Colombia, Argentina and Trinidad, so,that Peru's share· of South American output dropped as follows~

1920 .. . ~ ................. , .. . 1925 .......... _.* ...... , ....... .

1930 ......... " ........ t ........ .

11~.3 05 ......................... . .;.t4 ....... ~ .................. .

1945 ............. l!" ....... '.' .... .

'949 ..... . ........................... ., .. . 1950 .............. , .... " ..... ..

Peak output was attained in 1936 (17-.6 million barrels) and fell off thereafter. Production of 14.8 million barrels in 1949 waSt however, the highest since 1938. . .

Exports have fallen off even more shalPly because rising internal con~ sumption has limited the quantities aveJ.lable for export.. In 1930, domestic cnnsumption amounted to 2.2 million barrels, leaving en export surplus of over 10 million barrels, largely crude oil. lrJ 1946 wben production was little dif­ferent from 1930 levels, exports had fallen to 8.3 million barrels. respite an increase of 2.3 million barrels in production between 1946 and 1949, exports increased only 0.2 mUlion barrels. Between 1930 and 1949, intenle,l consump­tion had risen from 2.2 million barrels to over 7 million barrels of petroleum products. It should be noted t~1at Peru customarily imports about 100,000 bar ... rels of special petroleum products, including lubricants.

Proven reserves at the end of 1948 were estimated at 160 million bar~ rels, a figure which makes no allowance for potential reserves east of the Andes which ~e believed to be substantial. One particularly promising area is the Hontana region. which one oU official estimated would require $250 million and at least ten years to develop properly. Another favorable area, the Sechura desert, was the subject of a proposed concession which has not so far been approved by the Peruvian 1e gislature.

E~loration has been limited to coastal areas in the northern part of the country (except for the operations of the Ganso Azul Company east of the Andes, "Ihich accounted for less than 1% of the output in 1949). The remainder of the country has been designated a government oil reserve on '!If'hich limited concessions uay be granted '~!ith legislative approval; none have been granted

• to date. It would appear that the Peruvian Government will find it necessary to makeroncessions available to private investors on relatively favorable terms, if a decline in Peru,' s net exports of petroleum is to be avoided. Re .... vi sion of legislation governing oil is at present under consideration by the

'"- 8-

Peruvian Congress. The Peruvian price control regulations have controlled domestic prices for petrol-etlJlr products at levels much below world prices .• Because reserves are limited and nel" concessions have been unobtainable," the combined effect of increased domestic demand and internal price control has been to reduce oil company earnings and to retard development~

Manuf acturing

According to the 1940 population census, "380.000 persons, or15% ot the occupied population, were engaged in mamfacturlng. "The greater part of these '''lere in household or handicraft industries; 266,000, or 68% of the total were propr:1etors, members of the family, or independents not attached to aQf particular employer. If appro4tmately ISO manufacturing establishments employing about 20,000 workers were excluded, the Census results indicate that there "were on average slightlY over two paid workers J:8l' proprietor. a fact iJ.lustrating the small size of the majority of Peruvian manufacturing es­tablishments.

In 1940, the census showed that almost three-quarters of riianufacturing employment (including handicrafts) was in textUes and clothing, with food and beverages next. There is no subsequent data covering the whole of mBn'l1-facturing, but there is some information for non .... handicraft industry from the annual industrial surveys. By 1947 the survey. l1,'IholJe scope has expanded each year, covered 2,816 establishments employing 100,000 workeJ"S. or an avera.ge of 35 .. 5 per establishment. Textiles and apparel provided 35% of eInEloyment, and food and bever~s 15%. No other manufacturing ~oup exceet;led 6%. In 1944. horsepower per person employed averaged only l.S for all industries surveyed •..

Comprehensive figures on industrial growth are lacki:pg. The indica­tions are. however, that manufacturing has expanded in the postwar period rather rapidly. National income estimates show that the contribution of manufacturing to gross national product rose frOID: 1~.5% in 1942 to 17% in 19491 In 1942 . domestic production supplied 43:;'; of durable goods purchased by consl.mlers. and tte proportion y:as 66;0 in 1949. An index of the physical volume of production for l5 industries prepared by the Central Reserve Bank shows an annual rate of growth averaging about 4~ from 1942 to 1949.

It is important both from the point of view of economic development and of the balance of payro61 ts that this trend continue. Accelerated economic development in Peru is likely to generate severe balance of payments pres­sures, which can be eased if efficient domestic industIi escan economically replace former imports. Great caution sh~d.t however, be exercised in usm@; high. tariff protection as an incentive or the industrial growth brought about in this way will not necessarily add to total national income~ Once the.liInit of efficient import replacemeat ~s reached, further sound industrial develop­ment would be limited by the growth of consumer purchasingppwer in the non­indu.strial sectors t which i.n tum follows from the integrat1i.on and development of the monetary economy ..

..

Transport ,

The rugged topography of the country has made communication between vario'"t;s areas of Peru exceedingly difficult. Peru has ttVO north and south longi tudinal primary roads, a series of lateral roads connecting the river valleys and one main road extending eastward to the navigabl.e headwaters of' the Amazon. One of the longitudinal roads on the coastal plain constitutes the Peruvian section of the Pan-American highway. It is the most important arterial highWay in the country, and is 1,740 miles long.. It links the river valleys and passes through 17 of the 30 principal cities, although grip of its length is in desert country. Its condition varies from good to poor. The Sierra longitudinal road, 1,430 miles, which is not continuous, passes througn the fertile high valleys and traverses a number of mountain ridges. It serves about 10 nore of the principal cities. The secondary roads are generally short and confined to the irrigated valleys along the coast and the well­watered areas in the Sierra region. The shortage of secondary or feeder roads, hc.wever, is severe. Considerable populated areas ll."lder eg;dcultu:ral production are entirely without adequate communication with e1 ther of the primary systems and. accordingly, their produce either does not enter into the national economy or does so under severe handiCaps,

One of the most iffiportant arteries in the domestic transport of Peru is coastwise shipping. In addition t Peru's foreign trade must of course be handled b:'T the ports on the Pac~fic Coast. Peru is unfortunate in possessing only a singl,e good natural harbor, that of Chimbote Bay. A modern pier has recently been cOll~leted by the Frederick Snare Corporation.

The most irf[)ortant port in Peru is Callao, some 15 kw. from Lima. This is an art ificial port wi tb moles, modern docks and handling facilities. The second most important is IVlollendo, the terminus of the railroad and the high­ways leading to the provinces of Pupo and CuzCQ and to the area near Lake Titicaca. A considerable part of the international freight to Bolivia passes through the Po.rt of 1.'1ollenOO and over the rGi 1 road. for trans-shipment on Lpke Titicaca to Bolivian ports across the border for rail shipment to La Paz. The alternative route for ocean-going freight to Bolivia is through the Chilerul ports of Arica and ATltofagasta, which are connected by rail with La Paz.

III. I11!J$BNAL FINANCE

Government F!nance

Until recently the Peruvian budget has traditionally shoi'1Il a deficitj, in the thirty years 1915 to 1945 for example, there wa,s a surplus onlY once -­in 1935. In the period 1939 to 1945, total expenditures amo~ted to 2,651 million soles. and total deficit to 569 million soles. or 2ljb of expendi tures~,

... 10 ...

Deficits were covered by credit operations" Since the cessation of borrowing overseas during the depression, such operations have necessarilY been internal, and virtually wr..ol.ly with tbe Central.. Ballk. In the period 1939 to 19+5, the internal debt reported by tp.e Peruvian Goverr.unent increased 622 m.i.llion soles, of which 4;8 mill~on 'fras repreliJented ll~T inprease of floating and short-term Qebt. Over the same period,. Central Bank accommodation to the Government increased 465 million soles, or at an average rate of 67 illillion soles annually. '

From 1945 through 1948 Central Bank loans to the Government increased at an average annual rate of 55 million soles, accompanied by GoverIllilent bud .... getary deficit each year. In 1949, however. the trend was completely reversed.

nwREASE OF CENTRAL BANK CREDIT TO GOVE.BNMENT (millions of sales)

'C"777E7""trrr=' • 193~5

j t

1946-48 ~ose "

II , ." t. t. t ~

National defense ............. " .... " 261,,5 a·6 Food subsidies •••••••• !t ... ~ ...... 46.6 10 .0 Consolidated bank loan .......... " 157.3 12.2 Subscription to !BED ••••••••• ~ ••• 2.3 Discounts of Government paper •• 42.5

Total ......... , .................... 465 •. 5 165 .. 6

; ,

1949-20

... 19~2 - 30 .. 6 - 6.0 - 0.1 . -:' 20.5

-76 .. 4

. ti Includes several credits for public V!orks. plus consolidation of advances to Government on current account.

EJ Under a Law of March 1946. thes~ may total one-sixth of Government budgeted :r;-evenues ..

Source: Boletin del Banco Central del Peru.,

The pur:poses to which Central Bank loans to Government have been ap­plied suggests that this source of domestic inflation may be avoidable in the future. Food subsidies. for instance, were terminated in Octob~r 1950.

In both 1949 and 1950 a surplus was achieved on the Budget and Special Accounts, sharply reversing p.revious budgetary experience.. In 1950 Government revenues. amounted to 2.115 million sales ($141 mil:J.ion) t with a realized sur­plus of 61 million soles ($4.07 million) or nearly 3% of revenues. In both years Government borrowing from the Central Bank di sappeared and we.s' re­placed by rep~ents ..

1hether inflationary deficit finance ca~ be avoided in the future wi~1 depend partly upon the growth of Government revenue in relation to ex­penditure requirementsr- since no non-banking bond market has as yet developed .. Peruvian budget revenues over the past ten years have actually Sho1VIl con­siderable increase. There is no fully satisfactory index available for reduc .... tion of current revenue figures to constant values. but using the wholesale

-11-

price index, 1950 budget .receipt s expressed in 1939 soles were 56% higher than those of 1939. .

The present revenue structure, with relatively high reliance on direct taxation, suggests that revenues may continue to grow. _ Moreover. the available evidence indicates that Government revenues are running around 15% of nationel incolle, which should be adequate, if properly utilized, to permit a level of developuental ex.penditures which could with careful allocation contribute to facilitating production growth t even if inadequate to cover all useful .invest­ment purposes.

Budgeted expenditure purposes reveal a high proportion of expenditures in directions remote from the directly economic, and a high level of expendi­tures upon personnel.

PEh"UVw BUIGETED EXPEhDITURES, BY FURPOSLS. 1951

11JIpose

By Ministri..::!

Police and armed services ............ , ..... it .....

Legislative find justice ..................... . Education ..................................... ," .. .. P,~blic health ............................. -t. .... .. Finl:)uce and commerce 0 •••. 0 ••••••••••••• ~ ...... .

Pu.blic works ................................. ~ ... . Agricru ture ..... It ....................... ., ••••••

Total budget and special accounts •....•

13yService

Personnel ....................................... Material ................ ., .• ., ...... to ........... .

Transfers subsidizing local activities •••.•• Debt service .................. " .. ' •...• , .••.•• Other •.•••••••••••• , .................. ~ •..• ' .... .

Total ordinary budget only ......... _. ~ ••••

Source: Presupuesto Gener81. 1951.

Million sales

735.3 115.3 292.9 134.1 376.7 247.6 ~6.7

1,938.6

875.6 226.5 158.9 107.3 273.6

1,640.9

'; , Per Cent

100.0

53.3 13.8 9.7 6.5

16.7

.l "'0.0

Personnel expenditure is not nrimarily for the civil service, which in 1~5l took only 179 million sales to cover 20,391 vrrli te-collar employees (ex.cluding senior supervi sorJ staff), cOf!lparedvrith 259 million soles allo­cated to military personnel. Of the 226 million soles provided in the ordi­nary budget for purchases of material, 3B~ (87 uillion sales) ~as for consump­tion goods, and only 19~ (44 million sales) for construction and repairs. GoverDiJent iltve3tment expenditures have contained a high element of payment to personnel as di stinct from l.Jaterial.

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The next table summarizes a detailed statement of those official ex­penditures classified in Lima. as Uinvestment," covering the years 1~47 to 1949. .

UTVEST".wrENTS EFFECTED BY THE PERUVIAN GOVERNMENT

Purpose

Increase of capital of development banks ........ ..

Increase of capital of regional development in­stitutions ••••••.••• , ..••

Rousing (a) GJvtto Bldgs •..• (b ) Military ...... .. I ~ \ Ot' \ ( ..... ) ner ......... .

Transport (a) Roads ••..•••• (b) Rail •.••.• ~ •• (r.;) Ports •.•..•••

Irrigation ~ .••..........•.. Publio rlorks ................ . Eduoation •••••.••••••..•• ~. Health and water supply ..... Public welfare •••••••.••.••

Tota;L .!'! •• ~ •••••••••••

4.5

18.,2 7·1 7.0 6.1 0.8 3.5 6.0 4.1 2.9 0.1 4.5 0.2

Actu.al (million soles)

24.9 1 .. 3 4.3 5.1

30.6 1.6 2 .. 9 6.2 3.6 0.1 5.2

39.5

132.4 ~77.6

0.5

2.0 0.8 0.7 0.7 0.1 0.4 0.6 0 .. 4 0.3

0·5

jfer cent

2.4 0,,1 04 , 0,5 2~9 0.1 0~3 0.6 0.3

.... 0;.5 3.8

12.6

2.1

3.1 0.1 2.6 0·3 3.2 :lo.O 0.1 2.3 0.4 O~g 0.3 3 .. 2

20.1 -Total ordinary a~d special

budget eAllenditures (actual) 934.9 1051.1 1389.5 100.0 100 0 100.0

Source; Data supplied to IBPJ) lvii.ssion.

It is noticeable that although these expenditures have stendily in-· creased in the postmaI' years, in 1949 they were still relative1y10w at several points critical for economic developuent. Expenditure upon irriga­tion, for example, was less than thet upon military housing. Total expendi­ture upon transport and irrig[:tion combined was somewhat less than 150 mil­lion soles (US$ 10 million) over the ~'ho1e three-year period, the largest part (90 million soles) having been made in the last year. It is reported that in 1950 Government investlilent in transport and irrigation amounted to 97.6 mil-lion soles ($6~ 5 million). .

It would seem that Peruvian Government finanoe should be able to se­cure some expansion of officia developmental investment in basic services without enoountering immediate inflationary difficulties, In quantitative terms, however, the magnitudes involved are not great. Official investment resources in soles from Government revenues are unlikely to substantially ex­ceed the equivalent of US$ 10 million annually rithout sJ;2cial fiscal measures

- .13 -

an.d reallocation of expendi tures.This estimate is consistent with that for total savings which indicates that total domestic resources for productive in­vestment are unlikely to exceed the equiv'alent of $40 to 50 million annually.

PUBLIC INVESTHENT RESOURCIDS (US$ millions; soles converted at 15)

1949 ,

1950 actual budgeted

Budget expendi tuxes 92.5 109.7

.Per cent devo~d to 20Y Investment • ........ • 'y ........... 20.1

Investment expenditures .•.••••••• 18.5 22

Portion for transport, irrigation 6.4 and. public works ................... 7.0

!I Assumes 1949 proportion.

· 'PI f'Investment" of all tJ"Je s as shown in preceding table.

21 Assumes maintenance of 1949 ratios.

1951-1952 hypothetical.

• -125.0

(i)EI W-

(ii)9 ~

25 31

8 .. 5 12 .. 0

· 2:1 Assumes "investment" increases to 257~ of budget, and Palf of increase allocated to items specified.

l ,~

Money SupplY and.Pri~es

Budgetary deficits financed mainly by the Central Bank and by credit expansion of private commercial banks have been responsible for the largest

· part of the more than sixfold increase of money supply in Peru since 1940. External influences operating through the accumulation of gold and foreign ex­cbange holdings of the banking system accounted for only a small percentage of money supply increases, the percentage ranging from about g'foto 2l% of the annual increase during the last ten years.

Inflation was mainly latent or potential from 1940 to 1945; ,money supply increased by 200% while wholesale prices increased by onlyS3%. In-

. flat ion became more active from 1~5 througbthe middle of 1949; money supply grew 8Cffo, wholesale prices rose l~% and the velocity of circulation of cS:t.eck­ing deposits was .rising. From the middle of 1949 to the beginning of 1950 tbere was an actual decline in money supply of about 3% brought about by stringent credi ~ controls lwposed on the banking system in July 1949, to which reference is made below.. This decline of money supply. and the in.crease in prices that had taken place in the previQilS periods'eemto have ccmbined to absorb "latent rt or "potential" inflation from the previous expansion of mone~ supply. Priees remained virtually stable during the second bal.f of 1949. !I.bese

I

tendencies continned to operate during the first three months of 1950 and ~re interpreted in Peru as meaning that stabilizatioll may turn into a serious de­flation~ As a consequence, the restrictive credit policy established and carried out successful1.y since July 1949 'I'\/as t'eversed in l,Ia+'ch 1950. From this date on, money supply resumed its fOI'Qler expar .. sionary trend due n:JE4nly to increases in commercial bank credit after the restrictions were l.ifted.

New inflationa..7 threats appeared toward ~he end of 1950 and eal'ly 1951 through external factors, such as the substantiaj. export surplus afte;!" Koreao During the first five months of 1951, gross gold anc\ foreign exchange holdings of the Central Bank increased from US$ 51.9 million at the end of 1950 to US$ 72,~3 million at the end of May 1951, and resul-ted in a net addi­tion to money supply of about 300 million soles, or about 14% of the December 1950 level. In addition to these external factors of expansion, credit opera­tions of private coIlJlllsrcial banks during the first five months of this year were about 7:ffo larger than in the whole year of 1950, in tu.+n 1!'!ere 28% ovel" the level of 1949 when credit restrictions were applicable. As a result of both external and internal. factors, money supply has incI'eased about 307~ from I:ecember 1950 to M8¥ 1951. It aho\lld be po:'nted out, however, that the Gove1"l).­ment by closing its budget with a surplus during 1949 end 1950 bas novr become a defla.tionory rather thc.'m inflationru:v influence.

On May 15, 1951.. after informal. discussions ~!ith an n'lF Stuci¥ Group, V'lhichwent to Peru at the invitation of the Central Bank to study the infla­tionary Situation, reserve reqUirements of private commercial banks were ~aised higher than in July 1949, to a level e~ected to ster~ize about one­half of the then existing reserves" Reserve requirem€.t'l ts . for sight deposits were raised from 15% to 20%. and for time deposits from 6"fo to lCfp. Secondary reserve requirements fOf neVI deposits beyond the }.'!ay 17, 1951 level are 50]6 and 257;) for sight and time deposits, respectively.

The measures already taken are not as stiff as might be necessary to sterilize all excess liquidity but should assist in the effective implementa­tion of an anti-inflationary program.

IV. EXTERUAL ~RADE I1l'TD FINANCE

Foreign Trade

Pe:ruvian eJqJorts are more diverse tr.tan those of other Latin American countries. although al~ export products react with notable similarity to the vicissitudes of vrorlc;l faw materiels mSl'kets. In no case is Peru a dominant contributor to world supply ..

The majo:r agricultural. exports, sugar and cotton. ~og;ether account for almost 5010 of postwar exports by value; mineral export~. of which petroleum, copper and lead &1'e themost~ortant f. comprise about 30% ...

. I

EXPORTS

.~ '--~~v~~·~~~~~===·~--=·~'~t==========-~.======~M~rum~~mar~~=et~s~

(million US$) ~ ,,' Per cent (Latest year. IsM Cornrtodity 1939 1948 1949~~.19.39· i94f-.---1§i'::T'+~9 or 1949)

Cotton 14.2 42.8 46.4 19.8 26.4 29.9 1949: Europe 45%, u .. s. 25%. India

Sugar 7.7 35.0

Petroleum 20.8 28.9

Lead 4.5 1406

Copper 13.4 7.6 Zinc 1.9 6.0

Other

Total

9.2 27~4

71.7 162.3

23.3 29.0 17.8

14.5' 6.3 9.0

9.7 18.7 4.7 7.7 2.6 3.7

16.4

28.0 12.8 16.9 18.0 155.1 100.0 100.0 100.0

7%. L"A. 201b 1948: L.A. 65%,

u.s. and Jaoan each 15% -

1948: L.A. 80%, Europe 15%

1;148: 'L.A. 28%. U.S .. 63%. Europe 9fc

1949: u.S. 8Ztb 1948; Can?da 25%,

u: .5. 33%, , Europe 4170

1948: U.s. 255&, Europe 20/0, L.A. 4C1fo

!i Ca;t.culated from trade statistics in sales, and liable to error due to 1949 exchange mixing system.

SQurce~ 1939, lmue.rio Estadistico del Peru, 1939; 1948 and 1949, Banco Cen­-- tral de Reserva del Peru, April 1950. Market data chiefly from U.S.

Foreign Service Reports, or U.S. and U.K. import data.

In terms of volume, there has been no marked increase in any item other than zinc and lead, and petroleum has shom a significant decrease.

VOLU,l:E OF EXPORTS (thousands of metric tons)

I I

Year Cotton Sugar Petroleum Lead , CC12p:lX" Zinc 1 ; .--

1949 77 277 1,449 41 35 17 19 8 52 369 1:,033 46 13 47 1949 56 282 1,099 .~ 28 60 1950 74 291 . 1,031 27 73 Source~ Boletin del Banco Central.

-16 -,

Wartime restrictions on non-food crops reduced acreage planted to cot­ton, and the prewar cotton production level has only recently been recovered. Domestic consumption of sugar is steadily inCl'easingj it was 4~~ of produc­tion in 1948 or about three times the level of 1929. Since both commodities depend heavily on irrigation, future production gro1'1th is primarily restricted by area of irrigable land. 1lbr sugar. the 1950 eJWort volume represents a more reasonable expectation for the future than the unusually hig..lt 1948 level. In the case of cotton there may, however, be opportunities for improving yields, end some displaceoent of food crops is also possible, although not necess~ll'ily desirable.

Petroleum exports have fallen partly because of some fall in production but primarily becruse of increased do;.).estic consUlnption. Production of most other minerals has diminished from the peaks achieved under the impetus of war, although substential development of lead and zinc projuction since the war r&­sul ted in record output of these metals in 1949- Lead has displaced copper as leading metDllic export by value during the last three years t and is likely to retain its pre-eminence if relatively large mom lead reserves are tapped •

.Although the dollar value of exports increased ~ times from their 1935-39 average to 1950, United States prices (as measured by the U.S, ~ole­sale price index, the only available rough measure of Peruvian import prices) have doubled. and population greV! 25~t over the SC:IDe period. As a result in 1950, in spite of high raw material prices, the import capacity per head. was only roughly equal to 1935-39.

Years .~orts

total per capita (US$ millions) (US$)

111.5 75 .. 8 7305

153.4 160.5 150.7 194 .. 1

22 .. 55 12094 1]".37 21.53 22.29 18.41 23.96

u.s. whole­sale prices (1948 :.; 100)

29 '"19 57 93

100 94 98

Per capita ex_::>orts

(1948' dollars)

37.58 26041 19·95 23.20 22.29 19.56 24.46

The make-up of imports is shol'lD. in the following table. It is notice­able that the reduction since 1925 in the relt:tive importance of some consumer goods (textiles. paper, ceramics. and other) t~s been accompanied by expanded imports of machinery and ma."lufactures. The grot'Jth of food imports in the

last deJ is elso very DOtlceable.

PERCENTAGE DISTRIBUTIOU OF VALUE OF n1PORrS

~~dity i • I ~~2~ 19Q) 1~8: : l~~

Machine~ and vehicles ••••••••••••• 15,3 20.3 27'2 37.0 Food products •••• ~ •• ~ •••••••••••••• 23.9 12.0 24. 21.0 Metals and manufactures ••• ~ •••••••• 12.7 l4.5 10.3 12.0 Textiles and manufactures .......... 17.3 l.5~3 9,,5 7.0 Chemicals and pharmaceuticals •••••• 7.3 15.1 9,1 9.0 Paper and manufactures .............. 3.2 3.1 2.6 2.0 Ceramics (earth. stone, glass) ••••• 2.3 2.5 1.9 2.0 Tobacco cmd manufactures .. ~ ........ - .3 .6 Beverages ........................ ~. .1 .5 .2 Others ••••••.••••• ~ ••••••••••• ., •••• 17·9 15,8 13,7 10.0 ,

Total •••••• , ••.••••••• " ••.•••• 100.0 100.0 100.0 100.0 Total in millions of dollars ••••••• 51.7 167.7 187.1

Source: 1925, 1940, 1948, Division of Economic Research, Pan American Union, liThe Peruvian Economy"; 1950. I'The ?roblem of Inflation in Peru. If nJiF Paper. May 2+. 1951.

The geographical distribution of 'total trade since 1937 reveals some displacement of the United Kingdom by the United States, and of GerlDBD¥ by Chile, as export destinations; as a source of icrports, the United States has steadily increased in importance at the expense of Germany while the United Kingdom and Argentina have remained virtually constant,

!/ , ,

PRINCIPAL IMPORTS OF FOODSTUFFS

Volume Value (thousand metric tons) (tJ$ mill ions)

Commodity 1.~32 1948 l~ 1~:2~ 1~6 Wheat and wheat flour 1Cl).9 150.6 215.0 2.4 25.0 Ltl1k, evap. & condensed 4.9 3.4 6.4 .7 1.1 Pork lard 2,3 2.3 l.~ Meat and meat products • 3 14.0 15.6 .1 5 • Rice 21.0 5,5 .8 1.4 All other 21.6 20.9 22.8 1.8 10 .. 4 Total l68.7 196.7 262.1 5.8 44.8

Source: , 1

Da.ta supplied by Direccion Hacional de Estadistica. Dollar values obtained by conversion at official rates of values given in Peruvian soles.

- 18-

PER CUlT OF TOTAL EXPOBTS P1ill. CEnT OF TOTAL DvrPORr:I:S

1937 1949 1950 1937 1949 1950

United States 22 29 26 United States 36 63 53 United Kingdom 22 15 17 Germany 20 1 3 Germany 14 1 2 United Kingdom 10 9 17 Chile 6 17 15 Argentina 8 5 6

Source: UlF, ffInternational Finalcial Statistics, II Country Notes.

The recent distribution of trade suggests that Peru can experience currency difficulties so long as European currencies remain inconvertible. Within her T1estern Hemisphere trade, she has been earning dollars from Bolivia, Chile, Uruguay and Venezuela. which have partially financed her im­ports from the United States~

D!STRIBlJTIOl~ OF TRADE (US$ millions)

Western Hemisph~ u.S" To tel Europe Other Total

1948 Exports f.o.b. 39.9 104 .. 3 46.6 11.5 162.4 ---- Imports c.i.f. 90.8 134.6 24.7 8.4 167.7

Balances -50·9 -30.3 121.9 f 3.1 - 5.3

1~49 Exports i.Oob. 45.3 99.5 47.9 9.8 157.2 ----- Iwports c.i~f. 105.~ 124.5 35.5 7.1 167.1

Balances -60.0 -25.0 /-12.4 f 2.7 - 9.9

1950 ]L~orts f.o.b. 50.8 115.4 67.6 10.6 193.7 -- Imports c. i.f. 98.7 117·9 60.2 9.2 137.2

Balances -47.9 - 2.5 f 7.5 f 1.4 f 6.5

Penl customarily shows a deficit in non-trade items in the balance of payments. Services usually represent a small defiCit, while income remitted on account of foreign direct investment averages about US$ 13 million annually. Pri vate direct investment inflows have averaged about US$ 7 million over the past four years (1947-1950), but have fluctuated from almost US$ 15 million in 1947 to nothing in 1950.

A noteworthy feature of the Per"vian balance of payrJents is its con­tinuous approximate overall equilibrium •. Over the war and postwar period. ex­chan@6 reserves have sP~wn greater steadiness than in most Latin American

-19 -

countries.!! It appears as if in each period Peru simply ~orts to the limit of exchange receipts less other requirements. During the period 1945-1949 this resulted frcm quanti tative exchange and import controls (vrith a partial deValuation of the sol in September 1948) 1'.'hich succeeded in restraining total iwports to exchange availabilities. In November 1949 the sol was depreciated, and the exchange rate left flexible, while controls were reduced to enforcement of a prohibited list of imports utilizing hard currencies~

This apparent flexibility of import levels may in part. ho'wever. re­flect the present rate and nature of economic development in Peru. Outside the category of foods, many present imports may be postponable. whereas once the economy is geared to higher levels of equipment and. raW material imports the cOIIIpressible Iilargin may well decrease.

Exchange Rates and Policies

1:1 December 1946 the existing rate for the sol, 6.50 to t~le United states dollar; Has declared as the official parity. Subsequenlily the legal free rate applying to certl:'.in authori zed transactions steadily depreciated, reaching 20.43 in July 1949.

In September 1948 a forei&l exchange certificate system was instituted, leading to multiple rates for both exports md imports. Exporters received part of their proceeds at the officieJ. rate and part in negotiable ce:rtifi­cates, the proportion between the tv.'o clepending on the kind of product ex­ported. Private importers ~ere required to present certificates to obtain exchange, and also to pay a surcharge for certain groups of imports. In addi­tion, ir~orters of luxury imports paid the free rate and a higher surcharge. The system was varied from time to timet partly to ease export difficulties and partly to influence imports. The effect was a gradual de factc devalua­tion of the sol, the effective rate for commodity exports r;sing from 6.50 soles per dollar before Septembe~ 1948 to an average of 13.0 for 1949.

GROSS GOLD MID EXCHANGJ::: HOLDI1:JGS (US$ millions)

Year Amount Year .Amount

1937 · ...................... 7;0.6 1947 . .................. 1939

-' , 1948 · ................... 25.4 .. ...... , ... ,. .....

1941 · .................. 27.1 1949 ... ,. ..... ! .........

1945 · ....................... 49.4 1950 ................ 1946 · .................. 43.6 1951 (May) ........

This figure does not reconcile with the 1949 change in holdings shown in balance of payments statements.

Source: International Fincncia1 Statistics.

46.6 58.~ 56. 68·9 80.1+

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A system whereby all transactions are conducted at fluctuating. ra.tes of exchange was instituted in November 1949, the par value of 6.50 no longer being applied to any purpose. All import controls lrJere removed, except for a prohibited list (nmV' abolished) against hard-currency imports ..

As a result, the certificate rste fell from 19.04 soles per dollar in September 1949 to J1~.20 in E[arch 1950, and then rose gradually to 15.20 in September 1950. Rates since then bave been maintained b:T the Central Bank at the same general level. As its exchange reserves continued to accumulate, the Central Bank, in order to reduce its Oln exchange purchases and the corres­ponding inflatioDalJf repercussions, permitted exporters to retain exchange for their own use. The requirement that exporters surrender 100% of exchange pro­ceeds was lmvered to 75% on Narch 26, 1951, and on Hay 1 was further reduced. This liberalizing trend was, hOi-leVer, reversed a fev; weeks later when the re­quiremer.t Kas raised again to 75% and on Hay 17 to 100% as the Central Bank's own exchange holdings beg~~ to fall.

External Debt

Peruvian external debt in mid-1951 totalled Usj 125.1 million dollars (usC 103.9 million in dollars), as shOl'm in the table below.

EXTERNAL DEBT OF PERU Estimated as June 30, 1951

(in thousands)

~~ount (including undisbursed)

Dollar Debt Dol1a.r bonds outstanding ••••••.•••.•••.••• Ejcport-Import BanI\: ...................... 1' •••

Other U.S. Goverr..ment debt •••••••.•.•••••• Banque de Paris et de Pays Bas (Chimbote

Steel 1·1i11) ........................... ., .. ..

Total dollar debt ...............................

Currency Expressed of nayment in US$

69,205 21,688 3,497

Argentine foodstuffs credit ••••••..•••.••••• Pesos 54,732

9,500

0103,890

13,6491/

Sterling Debt Sterling bonds (12/31/50) .•.•••••••••••..• Guano loan (12/31/50) •••••••••••••••••••••

Total sterling debt (12/31/50) •••••••.•••••• Total debt .................................. .

E 2,281 E 432

E 2,713

6,387 1,210

I'· 7 r! 7 '.,) ,:/9 ":;125,136

Jj Payable in Argentine pesos, which Peru may either earn in trade or acquire by dollar purchase at 4.01 Argentine pesos to the dollar.

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As at l:ey 1951. 72:Jh of defaulted dollar bonds had assented to exchange into new Series A to D dollar bonds, as shown below as per unilateral offer made by the Peruvian Government in June 1947. This offer did not include $2.9 million City of Lima bonds.

Dollar bonds outstanding at time of 1947 offer •••••••••.••••• Not assented to offer, at face value •••••••••••••.•.•••.••••• ADsented ....................... , .•••.•.....••...• .,,,,. ........... .

Subsequently retired ••••••••.•.......•.•.•••••••••••••••••• Outstanding •••••••• ~ ................... , , ............. "', •• ' ••••• Sterling bonds under offer to exc~ in~9 Series E dollar

bonds, at face value converted at 2.80 lY ••••••••••••••••••

US$ millions

76.5 21.4 55.1 10.2

21.4

~ bb.3 6.8

73.1

!I At time of 1947 offer. sterling bonds amounting to t 2.44 million (US$ 9.8 million at 4.01) were outstanding. At April 30, 1951 t only:E 182,600 <7. ,fo: US$ 0.73 million at 4.01) had assented to exc~. The British Bondholders Council have objected to the January 1950 modification altering exchange basis for principal amotL~ts from ~4.01 per £ to 2,80 per E.

The President of Peru. has recently announced that it was his desire to arrive at a bilateral settlement with the bondholders and negotiations to that effect have been initiDted in York.

Estimated service payments upon present external debt are shown in the following table. It should be noted that the table shows service upon the Argentine credit, which is scheduled to retire the debt in 1954, as a non­dollar item; the PeruVinn authorities have not yet needed to expend do11Drs upon this service, and expect th~t in the future sufficient ,~csos :'il1 con­tinue to be earned in trade.

1952-56 1557-61 1962-66 1967-71

EST TI.w!ED DEBT SERVlOO Annual Averages uS$ millions

Ib11ar Service Amorti~ation Total

Total Service Amortization Total

5 .. ·11 4.17 3.49 2.05

Although present total service is low in relation to tot~ exports (about 4% ), it is almost T'fholly in dollars, whereas only some 30% of exports go to the United States. Service on dollar debt is a very high percentage (around 12%) of exports to the United States. Ibllars are, however, at present

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earned outside the United St!?tes. On this b<:1sis, dollar debt service fells to 2l"ound 5% of dol12r ec:rninr:r,s. It is 'lrobC'ble th::>t a negoti;"ted settleme:1t ~'lould involv8 n?~lrrte1!ts someT.rhat hi~her th<,,:,! those sh01:n above, raising ser­vice to 2Tound 5;, of eX"',.orts.

Remittances on account of income earned upon foreign direct investment represents a sizeable amount, the annual average for 1947 ..... 50 being uS$ 12.8 million which exceeds average new direct investment inflow over that period by around us.cp 5.0 million annually. }:oreover. new direct investment has fluc­tuated considerably, being (in uS$ millions) 5.6 in 1946, 14.9 in 1947, 8.3 in 1948, 2 .. 5 in 1949 and nll in 1950. The new policy towards foreign capital and the plans for expansion of mining and ore processing described above should normally bring about a substantial increase in c~ital imports.

Creditworthiness i •

Short-run balance of payments prospects are favorable, and likely to remain so while demand for strategic materials, particularly minerals, remains high. Peru I s long-run balance of payments position wlll depend largely upon the rate and direction of her own economic development.

l1i th the present level of private savings and the growth of Government revenues, it should be possible for Peru to achieve a useful level of invest­ment and growth of output without encountering severe inflationary conditions. It is, however, important tb&t Peruvian development policies neglect no oppor­tuni ty for economical export pfomotion or import replo.cement. While in the past iw~ort requirements have been flexible and Peruvian authorities have sho~ -~helJselves able to restrain total imports to exchange availabilities, it may become increasingly difficult to do so in the future unless part of the increasing consuwption requirements of a growing population are met from domes­tic resources.

Peru f S credi tworthiness depends upon the future effects of investment rather than upon the present balance of payments position. On the basis of present trends, Peru should be able to asgume additional dollar debt service of ebout $2 million annually, especially if private capital is attracted in expansion or creation of enterprises. This assumes, however. that financial policies minimhe future inflation, and that development policies seek export promotion mld import replacement, so that the balance of payments position does not deteriorate through forces originating wi thin Peru. While Peru might be able to absorb advantageously a som.ewhat higher level of borrowing) any ad­dition to the level indicated above '("'ould at present be justifiabl,.e only if re­payment were in non-dollar currencies.