The economic position of Peru

 No. E 128 CONFIDENTIAL This report is ~stricted to those members of , " I the staff to whose work it directly relates. . -~J 67051 .INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT THE ECONOMIC POSITION OF PERU " December 8, 1950 Economic Department Propared by: Harold Larsen  CONTENTS SUMMARY AND CONCLUSIONS .. • •• ., . " . . . . . · . · . . . . . .. A. PBODUCTION AND DEVELOPMENT 1. Retrospeo~ ~.. .. • • .- • .. • • • • • • . • • • • • • • 1 2. Prospect ~ a) Financial .. • 0 .. • • • • • • • • , • • • • • • 7 • b) Pol~tical ~d Soc~al in the Money Econonw .... 9 . c) SOCla! and J.:JconomlC , • • • .. • • • • 0 • .. • • 9 13. RECENT FINANCIAL HI STORY 1. t) Internal Inflation • • • • • ., 0 • • • b) Government Finance .. · . · · • • '. ~ • • • • •. t, o. o. .. • • • • • • • , • 0 12 16 ·• • r) c) Credit Oontrol • T 0 0 • 22 2. External Overseas Trade • • • • , • , .. • • · .. 0 o. 26 b) Balance of Payments ~ • 0 • 0 ; · · • . • 0 30 c) Exchange Rates and Policies d) External Debt • • • • • • • • • • • · · · •· · ·· · • • • 0 t 32 34 O. CBEDIT'ifOBTHll{IDSS 1. Present External Position • • • • • • • • • • • • " 37 0 2. Programming Possibilities • • • • t, 0 • • • • • • •• 4 3. New Lending (a) General Assumptione • 0 t, • • • • • • • • • • • 43 , (b) Conclusions • • • • • • • _,' 0 ••.•, • • • •• 43 APPENDICES ... .. · · ., • .. - ·. I. COTTON IN PERU • • '. • • '. • . 1 · 0 t, SUGARlli PERU • " " 0 .. 6 II. III. • '. '. • PERU-TRADE IU HETALS AND ORE'S " o. o. , ·• • ··• · • • .. • 0, 0" f • t, 0 • • • • ' t 11 IV. PERUVL~N PETROLEUM DEV.BLOPJ\JENT · · · ., · • ··• • ·• 15 . • , ·· ···· t. V. EXTERNAL DEBT HISTORY... • , • , ·'. , , 0 0, 0 . 0 26  PERU BASIC STATISTICS Area 482 300 t square miles Populat;.on 1939 6.9 million 1949 8.1 million Currency No 'Jfficial parity; rate fluctuates around 15 soles to the U. S. dollar 1 sol ~ 6.67 cents = 1 million soles US$ 66,667 National Income 1947 5. 450 million soles (US$ 838 million) ($112 per bead) 1948 1949 1950 (Million US$) (June) (August) Exports f., 0 < b • 156~8 15106 81.7 Imports c.iQfo 167.7 167.1 68.6 Gold and FOl'eign Exchange (Dec,) Gross, all banks (I.F.So) f:;806 ... 56.8 55.0 58.4 Net I Central Bank 12.8 10.2 10.7 (Million soles) Government Revenue 1021 1433 752 Expenditure 1051 1390 711 Money Supply 1780 1918 2018 2145 (1937 =100) 'lholesale pt'i.ces, all goods 396 553 616 67,3!/ Cost ofl!ving index 337 387 431 43il y July.  SUMMARY AND CONOLUSIOUS Production and Development So far as can be determined. production increase over the past twenty years has not kept pace with population growth. More recent produc- tion growth, however. shows encou~ng improvement. Prospects for maintained improvement are mixed. In the financial field they seem good, with real possibility of stability with more effec- tive investment rates. However. the political climate, altr~ugh more favor- able than formerly, may obstruct adoption a.~d execution of objective and longer..-range development policies, The underlying geographical and social difficulpies in..'1erent in the Pe.ruvian scene continue to limit immediate possibilities as well as foreseeable potential. :Peru cannot be classified with Chile or Colombia. whose more advanced development itself liberates op- portunities not yet available to Peru. Recent Financial History Since 1939 Peru has experienced an inflation as great as that of any Andean country. Its origin has been internel, due to budgetary defi- cits and to expansion of commercial bank credit. Government revenues have been buoyant f and are fairly high in rela- tion to national income" With the absence of extraordinar-j'" war-induced expenditures, it should be possible to avoid deficit while financing a -1 .... reasonable level of official investment. Emergent credit controls offer some possibility ,of diminished banking expansion. Cotton, sugar, minerals and petroleum cover 807h of Peru's exports. Except for zinc, their volume bas shown little growth., and their ,value has not kept pace with population increase. The regional distribution of trade confronts Peru with hard currency problems. Imports have in the past proved flexible in total, giving continuous approximate overall balance of pa~ents equilibrium; exchange reserves have shown greater stability than customary in Latin America. Accelerated econo- mic development, with higher levels of equipment and raw material require- ments, would induce greater import rigidity. In November 1949 official exchange parity was abolished. all trans- actions being at fluctuating rates; results so far seem satisfactory. The settlement upon external bonded debt has not been recommended by the bondholders councils. By December 1, 1950, however, 66.5% of dollar bonds had accepted the offer; sterling acceptances are negligible. Creditworthiness New lending to Pe~~ involves sizeable risks.contering externally upon her ability to earn dollars both in trade with tpe United States and elsewhere, and internally upon her ability to achieve development and a consequential overall balance of pavrnents position permitting not only en- hanced debt service but also transfer of a considerable income upon direct investment. To the 'l1program ri skit there is added an e¥ternal risk that total  trade may earn an insufficient proportion of dollars. Po ssible programming in Peru should adopt objectives suitably limi ted both in scale and in direction, seeking regional improvement and balance of payments strengthening as a ground1'Jork for longer-range future grovrth. Assuming an appropriate and effective development program, :;pd tllat . 60-%--:-65% of Peru's total export s will earn d.ollars so long as European cur- rencies remain inconvertible, new lending to a total of US$ 50 million over about five years could be undertaken, but no more than US$ 25 million should be in United States dollars unless specifically directed to improvement of the dollar sector of the balance of payments. - iii ..,  THE ECONOMIC POSITION OF PERU A. PRomOTION.AND Db'VELOJ?MENT 1. Retrospect Estimates of peruvian national income and accounts have been made for the period 1944-1947, but by methods which limit their international compara"": bility. They indicate an aver~ per capita income in 1947 of 725 soles, or US$ 112 at the then offi cial rate. This average figure is useful mainly as an initial starting poL~t for appraisal, owing to marked differences in per- sonal and geographical income distribution, and associated differences in the purchasing power of money to different people and in different regions. The coastal region, both urban and rural, is relatively bigAly devel- oped~ . Here lives only one-fourth of the population, producing about one-half of the total income~ Average coastal income per capita was thus around the US$ 220 mark in 1947. Perhaps one-half of the Peruvian population lives in a primitive economy, and disposes of something like US$ 30 per capita in income, while the 25% in the non-coastal, non-primitive economy probably averaged aro1.lIld US$ 170. The content of estimates such as these is illustrated as follows. NATIOW~L INCOME AND SAVINGS. 1947 (soles converted at 6.50) lngome Net SaYings Area Population per head . to ta]. i per cent total il (million) (US$) (US$ million) , (US$ million) Coast 1.9 220419 12,5 52 Primitive 3~8 30 114 nil Other 1.8 170 305 9 28 Totals 112 838 9.5 80 ~ Assumed as plausible possibilities'~  -2- Maximum net saving fromthe 1947 Peruvian national income coul~ not have ex- ceeded US$ 100 million, and was probably considerably less. Mobilization of more than US$ 40-50 million equivalent in soles for total new productive in- vestment, including private, could not be expected from 1947 domestic re- sources. This supports the conclusion reached later that annual budget in- vestment sources are unlikely to exceed. uS$ 10 million eqUiValent. Y These income differences correspond to and. arise from structural cU~ versity within the Peruvia.l1 economy. Although wholly dependent upon irriga- tion, the coastal. region is the most highly develo-ped, possessing all export agriculture, the greater part of commercial food production, almcst all pre- sent petroleum prodaction, and the largest proportion of manufacturing. The cO/i:!.staJ. region is wholly wi thin the modern monetary economy, while large parts of the Sierra or highland region are still upon its fringe. Y Outside mining, bighland production has not so far supplied much to the rest of the country beyond a small flow of foodstuffs to the coast and some minor exports such as wool. The million or so people east of the Andes are upon the fron- tier of a modern economy, and many of them still wholly outside monetary 1n- flu,ence. Although little of its o,m production (except for minerals) reaches the coast, the Sierra provides an important source of manpower for the coastal 1/ Despite the different years involved, real income will not have changed greatly, and inflation is taken into account by converting the 1947 na- tional income at 6.50 and possible 1951 budget resources at 15. Upon base 1947 :: lCO, July 1950 wholesale prices were 20].; with 6.50 as lOO, 15 is 231. ?i liThe population of highland PeN is Indian in terml;'l of race and Indian in terms of the attitudes and techniques of living. It James, Latin America, p. 145.  -3- eronomy. The seasonal labor requirements of coastal agriculture occasion a movement of workers from tbe bigblands. Since by fortunate coincidence the timing of peak labor requirements is not the same on the coast and in the highlands, these migratory workers can meet seasonal needs in both areas, or can provide casual construction and general labor on the coast during periods dependent upon the highland agricultural seasons. :I:hls enables a level of production on the coast that would not otherwise be possible, at least with- out greater mechanization. At the same time, a migratory worker's savir.g • from his coastal wage may represent a highland familyt s whole money income .. There is concurrently a steady gain of coastal population from the highlands. Between 1940 and 1947. total population grew 14% while coastal population grew 19%. With the growth of manufacturing, this is to be expected" Nevertheless, the Peruvian 8i tuation di splays some peculiar features. The· highlands have not yet been able to supply foodstuffs of the type and in the cpantity required by the coast, particularly in wheat and meat" y Thus the labor shifts associated 1;'!ith development have occasioned, additional food 1m- ports, whereas it is possible that at least part of these requirements could be produced in Peru. Attention to the hig..'!-U,and posi tion is necessary, since irrigated coastal agriculture cannot pro,-i.de T'!Jheat and meat economically t but rather the higher-priced crops for domestic consumption or e:xport. Agricul- tural development in the highlands, leading to inter-regional trade, will encounter not only indigenous conservatism Qut also difficul tiee of crop and, transport improvement., and perhaps questions of land ownership..51 But Y There are dietary diffe~nees between the coast and the highlands, whose main food crops are corn and potatoes. gj Whether the highlands are at present to be regarded as over-populated seems to depend upon interoretation of the conseq~nces of the present  -4- neglect of feasible opportunities may lead to lag of agri~ltural t~chniques and output, and unbalanced development. Comprehensive data are lacking for past long run trends in total Peruvian national income and production. All available evidence,· however. suggests that growth has not outrun population increase. In ag~iculture there appears to have been little significant growth in total area under cul- tivation: a was 1,463,900 hectares, and a 1943 estimate (by a 1929 estimate .. different authority and therefore perhaps by different methods) was 1,486,000 hectares. If this be the case, growth of agricultural production would de- pend entirely upon increase of yield ra~her than area. AGRICULTtffiAL PROUJCTI01:J IN 1929 AND 1943 (thousands of metric. tons) :Per cent Commodity 1929 chang'3 Population (millions) " ......... " <II' •• " ••••• 5.56~ t 26.8 Cotton ... ... '" . . . . . . . . . . . . . "... II- • , ,,·e . . . . . 56.0 Y. t. 19.6 Suga.,r ........ '" '" . • • . '" '" .. '" '" .• ~ ...: '" • II . . . . . . . . . . . . . 388.4 -g f. 11.4 Rice ........ '" .... '" . ..... ".~ .. '. . '. '" ....... '" ....... . 42.4 1: 114.2 Bar-ley ............... '" ................... ,'! . . . . . . . . . . 118.5 t. 15.6 Legumes .......................... ., -•.•• '.......... .. 57. 4 t 189.1 Corn ..... '" ............ ,. . '" '" .... '.. '., . " ...... '" ...... . 451.5 - 21.6 Pota.toes .................. '" .............. '" ............. . 820.4 - 20.~ Sweet potatoes and other tubers ....• 232 .8 3. Beans and peas ................................ . 139.1 ~ - 12.3 Wheat ." ........... "" ... " .......... " • ., ...... . 97.6 5·7 af 1926-1930 average. Source; liThe Peruvian Economy, 11 ~ 1941-1945 average. Pan American Union •. p. 7. pattern of land ownership and use. The large holdings appear to be under-utilized, yet unable to obtain their labor re~uirements upon cus- tomary terms from rural TlVorkers intent upon cul ti vation of their own small and less productive plots during seasonal peaks. Mechanization of large holdings appears at present to be sUbstantiallY more co.stly than labor, yet without it,or greaterilseof labor, production increase may lag. If there be no change of land ownership, the action of the large holders regarding mechanization or increased labor incentives will deter- mine the future relative pressure of population upon. resources in the bigpland valleys.  -5- .Production for export. which embraces part of agricu:),.tural production and all mining production, has not shown apparent growth)} In point of fact, export production occupies a very small proportiop of popul.ation; mi~ing about 45,000, and export agriculture about 120,000, or 165,000 persons in all, about 6% of the occupied population. Over twenty years the value of export s in terms of "constant dollars It per capita has actually declined, being in 1949 a little more than half the pre-depression level. ElPQ..li.T VALUES PER CAPITA Exports u.S. whole- Per capita Years total per capita sale prices ezports , (US$ millions) (U8$) (;1.948- ;; 100)' 1925-1929 •......• 1l1~5 22.55 '59 37.~g 1935-1939 ....•.•• "5.8 12,,94 1:19 26. J.. 1940-1944 ...•...• 73.~ 11,.37 51 19,,95 1941 .......... It • • l53A 21.58 93 23,20 J~~g •••••.••• '" ••• 160.5 22029 100 22.29 1949 ..... '" ........ . 150.7 18.41 94 19.56 Source: "The Peruvian Economy, II p. 217. Thus fragmentary but significant data suggest that over the twenty- year period the ability to acquire impo.rts bas steadily deteriorated, ',vhile EXPORT VOI.m.1ES PER CAPITA (Indices, 1929 :; 100) Total expor~ Volume per Year volume !:I PopulatioP capita 1937 ..............•.• ~ 119 115 103 1939 ......... ~ ...... . 97 120 81 1946 .......... .It., . . . . . . . . 107 137 78 !!:I Cotton, sugar 1 petroleum. copper t wool, hides and rubber i> Source: ffThe Peruvian Economy,~1 p. 217"  .... 6 ... - production growth in the two main fields of agriou1 ture and'mini.rig seems at best to have been' no greater than population increase,· and perhaps somewhat smaller. This, however, does represent a useful achievement in the face of a 40%.increas~in population from 1929 to 1949. It is important to add at once, however, that progress 'over the past ten years has been better than during the past twenty years which include the depression. In agriculture, there has been an increase of staple food craps • .. The shif~ away from potatoes suggests improvement of nutrition standards. The growth of domestic wheat production has, however, been insufficient to meet demand, imports growing from 115,000 metric tons in 1934-1939 to 139,C'00 in 1947, 151,000 in 1948, and 2l5,000 in 1949. AGRICULTURAL PROmOTION (thousands of metric tons) . Per cent change to COImlodity 1934-38 .1947 1948 1948 Population (mi1lions) .•• 6.24 7.57 7.73 f 23.9. Wheat ............ ., .............. 76 135 1~7 f 80.2 Rice .................................. 86 207 1 5 1.68.6 Barley ................• 118 208 161 t 36.4 Maize .... ;. ............ '" ............. ~ 452 612 621 f 37.4 Potatoes .............................. 820 ~ 672- 67 4 - 17.8 Iviilk ................................... 191 300 ~18 f. 66.5 479 f ~~ Sugar ........... "........ 382 28.0 Cotton .................. g4 67 - 23.8 ~ 1937. Source: FAO Monthly Statistical Bulletins. In mining there bas been a sizeable increase of zinc output ,off- setting a fall in copper. Manufacturing industry has greatly increased; one index of the volume of manufacturing gives a 40% increase between 1940  - 7- and 1945.. Industrial electric p01.Ver consumption in Lima and Callao· increased from :;6 .. 4 million ktvh in 1938 to 87.2 million kwh in 1947 •. Cement output has moved from 101,340 tons in 1938 to 255.640 tons in 1947 •. Road mileage grew from 23,610 kilometres in 1938 to 34,968 kilometres in 1948. ~with trucks in- creasing in number from 8,800 to 16,060. Recent trends tms appear to be more promi sing than those apparent from longer-ra."'lge retrospect; the growth curve may have steepened upwards .. particularly in the postwar years. 2. Prospect The Peruvian problem now is to endeavor to grasp the opportunity of- fered by relatively favorable postwar trends to overcome the obstacles which bave prevented better long run achievement in the past, obstacles ~r~se in- fluence may recently have lessened somewhat but still underlie longer~tange future prospects. In the field of finance, the present opportunities seem greater than the obstacles; in the political and modern social fields, the obstacles seem to have lessened, even if only temporarily; while underlying economic and social difficulties persist ivithout as yet any real change. Each of these will be examined in turn. (a) Financial Peruvian financial achievement has not been particularly encouraging. Inflation has been long-lived and severe. Yet it would seem tbat greater sta- bility could be attained witl"l.out real difficulty and at the SaLle time more ef- fective developmental investment accomplished if too much is not attempted. y. Y Financial matters are discussed in detail in the chapter upon t'Recent Financial Histor,y."  -8- It is important that the Peruvian tradition of budgetary deficit be overcome. The opportunity seems favorable.. On the one hand the immediate "causes" of recent deficit, namely expenditures ari sing from world ~'/8.r and from food subsidies, should disappear. On the other hand, buo.get revenues have proved buoyant, and are probably adequate to support an acceptable level of official investment. particularly if that investment is restricted so far as possible to projects of real priority for economic development. Embryonic credit controls are emerging in Peruj if the intelligent use of these be encouraged. and the Peruvian authorities recognize that here is a modern economic responsibility that cannot be abdicated, the second ma- jor source of domestic inflation should diminish. Externally, Peruls short-term position is not unfavorable. The pre- sent "war status" of raw materials markets confers a windfall gain upon her, one far from being absorbed by rise of her import prices. Her recent policies in the exchange field should encourage export volumes, just as her cessation of price controls and subsidies sr~uld encourage domestic production of some im.portant foodstuffs 1"i th consequential dioinution of imports. The financial changes arising from the recommendations of the Klein MissionY appear on the whole to have been beneficial. A unitary exchange rate, even if fluctuating, and the absence of qualitative import controls is preferable to a more complicated situation whoo e administration is defective y In August 1949 the Peruvian Government announced the apPOintment of an Economic and Finoncial Mission to II study the econoolc, monetary, fiscal and administrative systems of Peru. II Dr. Julius Klein lleaded this mis- sion of American experts, which was retained directly by the Peruvian Government.  -9- and lacks firm policies. The aboli tionof preferential import rates and subsi- dies for foodstuffs permits full impact of price incentives to increase d.omes- • tic agriculture. Provided th~ consequential t'l'age increases can be smoothly absorbed. removal of subsidies should lessen inflat ionary dangers in the short run by reduction of budgetary burdens and in the longer run by encour- agement to domestic production. (b) Political and Social in the Ivioney Economy He 't1\'ould be rash who would predict prolonged political stability in Peru. Yet the present political climate may for a while permit consideration of economic policies with some freedom from short-term political necessities. The relatively small group of omers and entrepreneurs in the lLonetary economy now seem far more ready to undertake active private investment and production than they did in 1948, at the time of the Ban..l{ls first mission to Peru. This, of course, is partially a reflection of present relative political stabili ty. Present entrepreneurial expectations .are probably for a minimum of Government policies affecting private enterprise, a factor v!bich develop- ment policies in Peru should take into account. (0) Social and Economic Underlying and very real difficulties, ho"',ever, remain, their recent influence perhaps temporarily lessened but certainly not overcome. These dif- ficulties arise from physical. social and economic conditions of a kind not susceptible to rapid c.hangs. The fundamentally inhospitable nature of the Peruviap geographical environment greatly influences her economic p9tentia~, increasing the cost of  - 10"-- much necessary investment. The fact that the whole coast is a desert compels irrigation. The Andean range not only creates transport difficulties, but limits the return to human occupancy of the area. Effective occupation of the selva east of the Andes is in its in!aney. and rill necessarily be a long-run and costly affair. Socially, Peru is as highly regionalized as she is geographically" Perhaps half the population lives in a primitive economy T?oose response to modern incentives and techniques will be slow. Side by side with economic de- velopment, there should be a process of social as well as economic integr~ tion. The pace at which such integration occurs will partially control the rate of economic development, which indeed is only one of the basic problems confronting Peru as a nation. In this respect Peru differs from either Uruguay, Maxico or Chile, or to lesser extent Brazil. ~hese physical and social considerations have economic consequences. But there are additional and underlying economic factors likely to be only slightly less malleable. Ownership and control of production resources re- sides with a veri small group accustomed to thinking in terms of monopoly. Incent! ves to increase output are weak or dlsregarded except in the rela,- tively new industrial sector, and even there the more modern outlook must first displace the older. The small group which comprises effective private initiative is also not accustomed to the exercise of modern economic functions of Government in a private enterprise economy. New policies of influence or control which threaten to be effective rather than formal are therefore likely to encounter resistance. On the other hand, in the short run such resistance may appear  -11 - justified, since Government in Peru has little experience of serious exercise of economic responsibility. Here again the situation differs from the Chilean position. Even assuming, however, that real endeavor, both official and private, be made to increase output, the margin for maneuver is not great. The restric- tions arise basically from the physical and social conditions already out- lined. Peru cannot increase traditional exports greatly or quickly; export agriculture (already highly efficient) is upon irrigated land, and minerals, ultimately exhaustible, require heavy investment for aCcess and/or rartial processing. Once outside the export sector, real increase of rural output involves changing traditional cultivation practices, irrigation and probably road-building. Real industrial expansion can occur so long as efficient domestic industries economically replace former imports. Heavy tariff protection or other restriction 1vould induce an a:!)parent in&1strial groT'fth, but one IlOt cumulati vely adding to total real income. Once the limit o;f efficient import replacement is reached, further sound industrial develo;)ment would be limi ted by growth of consumer purchasing pOt'ler in the non-industrial sectors, which in turn follows from the integration and development of the monetary economy. Peru thus presents far more visibly than many other South American countries the problems inherent in inter-related and reciprocal economic growth, implicit in the integration of an economy noV! segmented both geo- graphically and socially.  B. BECENT FINANCIAL HISTORY 1. Internal (a) Inflation Over the past decade, sizeable inflation has occurred in Pel'l~, which has since 1939 e:x.:perienced an expansion of money supply as large as that of any .Andean country. INDICES OF GROiiTH TO DECEMBER 1949 .~-- Money supply Cost of living Base Base Base Base Cruntry 1937 1939 1937 ~939 .Pe~~................... ,. .•• "" •••••••••• 827 660 419 419 Chile ~.".,." .. "."." .... " .. " .. """ .•. 79a 652 5·(7 535 Colombia .............................. Q " .......... . 71 625 310 26~ 515 477 ~~7 Ecuador ................... If . . . . . . . . . . . . . . . . . . . . . . . . , • Bolivia ............................. . 973 660 805 Urugua.y .................. "................................ . 390 372 181 172 USA. ................................. '" ....................... . 376 307 163 168 ~ v:holesale prices. Source: Calculated from IFS. This situation was accompanied by the features customarily asso- ciated with inflation, notably export and import difficulties, depreciation of the external value of the currency, deficit Government finance, and sub- sidy policies to avoid social unrest. Yet there has been ~n Peru, in contrast with other countries, little loss of banking exchan@B holdings in the postwar - 12-  - 13 - period. But neither has there been any increase of real national income per head over the period (1942-1947) for which estimates are available, and avail- able·production estimates suggest little growth over longer periods. OveX' the past ten years, the gro~rth of money supply has been mainly of internal origin.~ Two separate periods may be distinguished, that up to 1945. and that after 1945. In the first, inflation was mainly latent or po- tential; money supply increased 267%, while the cost of living index increased 831& and the velocity of circulation of checldng deposi ts fell steadily. In the more recent period, money supply grei'l sCf/o, and. cost of living rose 113;b; the velocity of circulation of checking deposits rising, particularly in 1949. On the external side, there is little to distin~ish the t~o periods. GROITTH OF MONEY SUPPLY BY ORIGIN' (millions of soles) Total Origin 1239-45 1946-49 1939-49 Internal Government ~ .••.•...•.•• -16.6 17.8 1.2 Central Bank .•..•.....•• 459.4 119.7 579·1 Commercial Banks •.•.••.• 227.6 442.2 669.8 Total Internal .•..•.......••• 670.4 579.7 External (net eXCbenge:d) ........ 104.5 27 2.5 377·0 Total Money Supply ••••.•..••• 774.9 852.2 1,627.1 ~ Accordir.g to Banco Central definition, viz, fractional coinage is":' sued by the Treasury less Treasur'J deposits on current account. E./ At balance-sheet values in soles, Source: Boletin del Banco Central del Peru.  .;. ; 14 - From 1939 to 1945 gross exchange holdings increased only uS$ 24 million;Y the annual dollar value of exports did not increase strikingly, and dollar import values increased almo st in step. There was thus no marked wartime accumulation of eXChange. Over 1945-19).t9, Peruvian barlldng exchange hold- ings have continued to grow, although at a reduced rate. The principal sources of increased money supply in Peru have been the Central Bank and the commercial banks. Over the whole ten years. each contributed about equally; but the Central Bank's impact was greatest before 1945 while the commercial banks' main growth was after 1945. In the earlier period, almost the sole source of Central Bank credit expansion was loans to Government occasioned by deficit finance; while tr~s continued in the second period, it was reinforced by loans to the development banks and commercial banks. Over the ten years as a wllo1e, however, by far the main reason for the Central Bank's own contribution to monetary expansion has been its loans INCREASE, 1939 TO 19+5 Of gross Of exchange aIL.'1ual Country holdings export valu.~ (millions (millions (per of US$) of US$) cent) Peru ., .. If ................ , ••••••••••• 24.0 36 58 Ollile ............. e" • ., f ............ . 76.7 74 58 Colombia ........•.. '........... , .. .. 155.0 63 81 Ecuador ... ... ..................... . ,. " 29.1 19 234 Bolivia ........ .................. . ., 30.7 41.4 106 Source: Calculated from IFS.  - 15 - y to Government •. Peruvian inflation has thus been somewhat different in origin from that of neighboring countries. External influences operating through the balance of payments accol,lIlt for only 13% of the increase of money suppl;l in Peru from 1939 to 1945, compared with about 8CY;~ in Colombia and 40% in Ecuador. Thi s was mainly because Peru t s wartiine gl'o1'J'th of exchange holdings was rela- tively small. Thus the fact that money supply increase was nevertheless as large as elsev;'here indicates that internal influences played a larger pl'imarJ role, In Peru, Central Bank loans to Government increased 467 million soles from 1939 to 1945, or 160% of money supply in 1939, compared with 23% in Colombia. Government deficit was thus a more important origin of inflation in Peru than elsewhere. This in turn seems to haVe been due to a relatively higher level of expenditures upon national defense and food subsidies. Upon the basis so laid commercial banks were enabled to expand their credit operations, particularly in the period 1946 to 1949. It is clear that INCREASE OF CENTRAL BANK CREDIT (millions of soles) Total Destination 1939-45 1946..49 1939-49 Public ..................... - 0.6 - 0.6 Development banks ••••••• o' •• 1.7 73·3 74.~ Corrunercial banks .......... ., Government ...... ;. ...•••••• o· • 3·2 4650 2 72.3 146.6 75. 612.1 Total • • • • • • • • "•• " o•••• ~ " • 469.8 292.2 761.8 Source: , Boletin del Banco C~ntral,. Peru (totals do not add because of rounding) •  '- 16- in the ,postwar period (1946-1949), characterized by vigorous commercial bank credit expansion, the authorities were not only unable to :prevent this trend, but the Central Bank through its re-discounts actually supported' it. The con- clusion therefore emerges that the two critical foci of Peruvian inflation have been Government deficit finance and failure to control commercial bank- ing policies. Each must therefore be considered more fully. (b) Government Finance The Peruvian budget has a tradition of continuous deficit; in the thirty years, 1915-1945, for example, there was a. surplus only once; in 1935. In the period 1939 to 1945, total expenditures amounted to 2,651 million sales, and total deficit to 569 million sales, or 21% of expenditures. Deficits were covered by credit operations. Since the cessation of borrowing overseas during the depression, such operations have necessarilY been internal, and virtually wr..olly '''lith the Central Bank. In the period 1939 to 1945, the internal debt reported by the Peruvian Government increased 622 million sales, of which 458 million was represented by increase of float- ing and short-term debt. Over the same period. Centr,al Bank accommodation to Government increased 465 million sales, or at an average rate of 76 million sales annually. Since 1945, Government deficit finance has 80mewllat slackened,~ !I Official budgetary and sp~cial account fi~es show a net surplus over the period (deficits: 1946, 8.0 million sales; 1947, 4.9 million 801es; 1948, 29.8 million sales; and a surplus in 1949 of 43.2 million sales). There are, however, additional expenditures for which the latest infor- nation is 1946; in tha.t year, such non....bu~"'9tary and special account expenditures Vlere 54.3 million sales nett additional to 617.2 million of other reported expenditures. Central Bank figures therefore provide the best available guide to recent aggre~te ach~evement.  - 17 - Central Bank: loans to Government increasing through 1949 at an annual average rate of 37 million soles. This average, however, conceals an ~mpro·.,ement dur- ing the period; expansion WaS mainly in the first two years, while in 1949 there was an actual reduction, supporting the probability of net Government surplus in that year. Y IUo.REASE OF CEN~t BANK CREDIT TO GOV'E:fu~1I2 (millions of soles) Total Purpose 1939-45 1946-49 1939-49 National defense ......!1 Food subsidies .....•.. ... ...... . ......... .. 261.5 46.6 - 6.1 ''>'15 C!. ~ •4 144.,8 98.2 Consolidated bank loan •...•.••• 157.3 9.2 166.5 SUbSCriPti~ to ISBn •...••••••••• 2.2 2.2 ill scount s . . . . ................... .43. 0 43.0 Y ......................... TotaJ. 465.5 146.6 612.1 !I Includes several credits for public works, plus consolidation of advances to Government on current account. El Under a Law of March 1946. these may total one-sixth of Government bud- geted revenues. !?l Total s do not add because of rounding. Source: Boletin del Banco Central del Peru. Analysis of the purposes to which Central Bank loans to Government have been applied suggests the possibility that this sc.urce of domestic in- flation might be avoidable for the future, provided the prewar tradition of deficit as acceptable in Government finance could be broken. With the economw in full emplo;yment deficit finance is highly inflationary, .and not justifiable y Ostensible ~lus, however, may be obtained by charging some eA~enditures to "profits" from go1drevaluation. Central Bank loans to Government in- creased 60~3 million soles ~n 1946,90.0 million in 1947, 15.2 million 1n 1948, a~d decreased 18.9 mil1ion1n 1949.  "'" 18- as it is at times. particularly in industrial economies, to induce re-employ- ment of real resources, Deficite on account of national defense and food • subsidies have been knom in the war and postwar period by countries other than Peru. and should in peace t~ be avoidable. Formerly extra...budgetar,f food subsidies were included to a total of 65 million soles in the 1950 bud- get 1".d th the intention that they should be covered by revenues, The Klein Mission recommended cessation of food subsidies, finally effected on October 10, 1950. Whether inflationary deficit finance can be avoided in the future will depend partly upon the growth of Government revenue in relation to ex- penditure requirements, tilere being no non-banking bond market yet developed. Peruvian budget revenues have over the past ten years actually shown sur- prising increase. There is no fully satisfactory index available for reduc- tion of current revenue fi~res to constant values; but using wholesale prices, 1949 budget receipts expressed in 1939 soles were 24;6 higher t.ban y those of 1939. The present revenue structure, with relatively high reliance on y :BTJDJET REVENUES 1939 19i+2 1945 , 1947 1949 Actual (million soles) ,. . . . . . • • • • ,!' ;~ 180 275 431 816 1,175 Wholesale prices (all goods) .... ... ~, 100 167 208 300 527 - Revenues deflated (millions of . 1939 soles) •••...•.••.••.. " .••. ~ ~ 180 165 207 272 223  ...:.19 - direct taxation, suggests that revenues may continue bUOyant.!.! Moreover, the somewhat scanty evidence available indicates that Government revenues are running at a sizeable proportion of national income, and one which should be adequate if properly utilized to permit significant developmental e~endi­ tures.§! Thus the indications are that local currency for official develop- ment investment may have been reduced by high levels of Government expendi- tures for other purposes rather than by any crippling inadequacy or inelas- ticity of total Government revenues. y COMPOSITION OF GOVEPNM.ENT Rl1'VENUE (percentages) ."'.--~ Income, Consumption, excess production, Total Non-tax profits, Customs turnover, tax receipts Country etc. Imports Exports etc. revemle ,af Peru 1928 6v6 28.7 6.t;; 35.2 83 . 6 16.4 Peru 1948 20.2 6~o 16. 19.7 66.9 33.1 Ohile 1948 12.1 20·a 0.01 10.3 70.1 29.9 Colombia 1948 3109 18. 0.3 1401 84.1 15,,9 Mexico 1948 24.3 16.3 5.2 25.6 84.1 15.9 !!I Receipts from public domain, from operation of government enter- prises, and able adndnistration and non-tax re~eipts. not includ- ing proceeds of loans. E.I The taxpayer may credit expo rt t8JC payment s towards payment of in- COme tax; there should be some adjustment on this account, but its size cannot be determined. Source: EOLA. Economic Survey of Latin America, 1949, Annex L, l?ublic Finance. , 1~7 (million sales) Peru: National income •.•••••• -'. 3.666 5,448 Government receipts (budget and special accounts) ............ . 357 541 930 Per cent .... -...•.•......•.. " .• ,'.. .. . 14.2 14.7 17.1  -20- Actual Government expenditures by purposes are not known. Budgeted purposes. however, reveal a high proportion of expenditures in directions re- mote from the directly economic. and a high level of expenditures upon per- sonnel. PERUVIAN BUrG1'TED EXPElWlTUBES, BY PtfRPOSES. 1949 furpose Million soles Per cent ----~~----------~----------------~~~~~~~------~~. By Ministries Police and armed services ...... .. ....... . " " 403.0 35 ..,0 Le~slative and justice •.••••• ~ .•.•••••••• 56.6 4.9 Education ..... ~ ••. " • ~ .•••.• ~ . ~ , .... ,. ........ .. 183.1 15.9 ~blic neal th ............................ fl ,. 91.6 8.0 Finance and cormnerce •.••..•.• "..•••.••.•••• 257.0 22 .. 4 Public works ...................' •.•••.•..•••••• 133.7 11.6 ~i cul tu.x-e ••••••••••••••" ••••' .'., ............ . 25.0 2.2 Total budget •..••.••.••.•.•.• '............ t' • • 1,150.0 100.0 (ActU£l.l expenditures) .' .••.•••.••••• " ••...•. 1,140.0 ~y Service Pel"sonnel ••••••••••••• '...... '.' •.• '•. t'.·.' ........ . 518.1 53.8 14.6 Material ••.••.•••••••••••••' t, • • . • ',. • • ' • • • • • • • • 141.2 Transfers subsidizing local activities ••.• 87.8 9.1 Debt service ••• ,., .•• lit .. , ••••••••••••••••••• 81.6 8.5 Other ..................... ~ .••••••.•••.••. e· •• ' 135.4 14.0 Total ordinary budget ...•••••• > ••••••• 964.0 100 ..0 Source: Presupuesto General. 1949. Personnel expenditure is not primarily a matter of the size of the civil service, which in 1949 took only 125.9 million soles to cover 23,747 positions,~mpared with, for example, 154 million soles allocated to ndli- tary personnel. Of the budgeted expenditures upon material, 38% (54,,2 mil- lion soles) was upon consumption goods, and only 19% (27 ndllion soles) upon "construction, repairs and. installation." These figures, placed alongside those to be presented next,.suggest that Government investment expenditures have contained a high element of ~ent to personnel as distinct from._erial.  .... 21- The Mission was provided with a detailed statement of those official expendi tures classified in Lima as "investment. 11 covering the years 1947 to 1949', of which the next table is a summary .. INVESTMENTS EFFECTED BY THE PERUVIAN OOV.illRNlv1ENT Actual (miJ.lion soles) Per cent Purpose 1947 1948 1~49 1947 1948 J.9)+9 Increase of capital of de-velopment be-nks , ..... 4.5 7·1 28.5 0.5 0·7 2.1 Increase of capital of regional development in- stitutions ........... :. ., ·0 .- 18.2 24.9 43.6 2.0 2.4 3. 1 Housing (a) Gov1t. Bldgs •• 7.1 l.3 9.2 0.8 0.1 0:7 ~b) Military ••... 1.0 4.3 36.7 0.7 0.4 206 c) Other •.. " ... 6.1 5.1 3·9 0.7 0.5 0 .. 3 Transport (a) Roads ......... 0.8 30,6 4}.g 0.1 2.9 3.2 ~b) Rail ••. , .. " 3.5 1.6 13.2 0.4 0.1 LO c) Ports ••.••..• 6.0 2.9 1.1 0.6 0.3 0.1 Irrigation .•...... , ..•. , .• :. 4.1 6.2 31,5 0.4 0.6 2.~ Public works •. o., •••• '.' .•• 209 3.6 6.0 0.3 0·3 O. Education ••.•.•••••• 0 •••• 0.1 0.1 10.8 0,8 Heal th and water supply •• 4.5 5.2 4.3 0.5 0.5 0.-3 Public welfare • co . . . . . . . . . . . . . . . 0.2 39.5· 44.9 3.8 3.2 Total .. .. ................... ' " 65.1 132.4 277.6 7.0 12.6 20~1 Total ordinary and special budget expenditures ( ac t'US-l ) ........................... 934·.9 1051.1 1389.5 100.0 100.0 100.0 Source: Data supplied to IEW ~,ii ssion. It is noticeable that although these expenditures bave steadilY in- creased in the postwar years, they were in 1949 still relatively low at several points critical for economic development. ~enditure upon irri~- tion, for example, was less than that upon military housing. Total expendi- ture upon transport and irrigation combined was somewhat less than 150 mil- lion soles (US$ 10 million) over the v!hole three-year period. The suggestion  - 22- ,.,"' ~ is certainly strong that. sensibly more could be Ul}dertaken in developmental investment if all other.expenditure pUXJ?oses were reviewed to secure economy. A general although still tentative conclusion emerges, namely, that Peruvian Government finance should permit some expansion of official develop- mental investment without encountering immediate inflationary difficulties. In Cj!lantitative terms, however, the magnitudes involved are not great. Offi-' cial investment resources in soles are very unlikely to exceed the equivalent of US$ 10 million annually without special fiscal measures and reallocation of expenditures. RIBLIC IlNESTMENT RESOURCES (US$ millions; soles converted at 15) : 1949 1950 . 1951-1952 actual bUdgeted. hypoth€tical Budget expenditures •••••. : ......... 92.5 109.7 125.0 Per cent devoted to (a) (b) investment~ ....•••.. "!!.I' .•..... · 20.1 . 2O~ 20 25 Investment expenditures ..••.. ~ .• ' 18,,5' 22 25 31 Portion for transport, irri- ~tion and public works ....... 6.4 n.a • 8.# 12.r!Y ~ Assumes 1949 proportion. EJ HInvestment ll of types sho'WU ih preceding table. ::J Assumes maintenance of 1949 ratios. EJ Assumes "investment II increases to 25% of budget, and half of increase allocated to items specified. (c) Credit Control It has already been seen that the commercial banks have contributed strongJ,y to past increase in money supply, adding,. for example, more in the period 1946-1949 than the other two Ifcausal ll sou::r:ceJJ combineo" . Their Y The balance of payments, and Oentral Ballk credits. ability to do so may indeed have sprung from growth originating in these sources, but there is no evidence that their response has been restrained by an effective attempt at control. In fact. however. same legpl instruments appropria.te for flexible credi t control have been created only t"i thin the last two years.. It· neverth.e- less appears that the existing distribution of administrative responsibility obstructs swift and effective implementation of policy. Beyond being able to require financial statements from banks request- ing a loan, the Central Bank traditionally bas not been specifically required to exercise qualitative credit control .. Such quantitative control as existed depended largely on rediscount rate. Virtually all commercial banking opera- tions are short term, i.e ... are of one year maturity by law and a large pro- portion of such paper, namely Government paper and commercial bills up to ninety days maturity acceptable inNe~ York, carries automatic rediscount right. Vlhile the Central Bank now has specific credit control powers in addi- tion to its issue and rediscount functions, the administration of many impor- tant regulatory powers are vested in the Superintendent of Banks, and approval of important policy decisions relating to money supply appears to rest finally witb the lliinistry of Finance • ..Prior to September 6, 1949. legal reserve requirements against com- mercial bank deposits were fixed 'f"itbout. pr01.ton for change at 15% against demand deposits and 6% against time deposits.~ In September 1949 the Super- intendent of Banks was authorized, "when tbe economic and credi t situation of 11 The Superintendency of Banks was" however, authorized to cop.trol the . method of computing :reserves, giving some slIfl.ll de facto flexib.Uity,.. the country justifies such action, and ath the approval of the Uinistry of Finance and at the request of the Directors of the Central Reserve Bank, ff to vary legal reserve requirements between 15% and 30% agains t demand deposits and between 61b and 12% against time deposits. Authority for change of minimum reserves then rested with the Central Bank, subject to Ministerial approval. Later, in July 1949. the Sl:perintendency of Banks was assigned the following regulatory functions, "with the knowledge of the Central Barll;:;J': 1/ to exercise close qualitative supervision over bank credit, to restrict tbe amount of credit to any one borrower in proportion to the borrowerts existing indebtedness', to restrict cred! t extended by anyone bank to a fixed propor- tion of its capital and reserves and to alter legal minimum reserves. No de- tails upon regulations issued in implementation of these powers are available. Thus the Central Bank is at present an important authority in credit control. and, if the Bankts prior knowledge of the Superintendency proposed action is in fact administ;ratively interpreted to involve consent, the principal authority. Administration of these discretionary powers, created in the last two years, presumably suft era from some inexperience as well as from the awk'ViJard even if nominal separation of regulatory, administration and issue functions. There may have been in addition some recent misjudgment upon policies •. The events were as follows: in June 1949 minimum reserVe requirements were raised to 17% for derJand and 8'% for time deposits. no great increase. Y This clause is interpreted by a Peruvian llbbassy lawyer in washington to mean that action of the Superintendent requires prior knowledge and con~ - sent of tbe Directors of the Central Reserve Bank. -- Money supply c9p.tfact~q. 3% from June 1949 to March 1950. which iJl offi cial statements was attributed to credit restriction~. On April 3, 1950, reserve requirements were reduced to their former levels (15% and 6%) and money sup- ply resumed its former growth~ The restrictive action of June 1949 was apparently undertaken follow- ing fears of excessive speculation in exchange certificates financed by bank credi t. There were, however, independent deflationary factors, principally a budget surplus, whose influence does appear to have been taken into account by the monetary authorities,ll The result of reduction of commercial bank minimum reserves appears to have been an almost iIJIIlediate expansion of money supply and of commercial bank loans, the rate of expansion apparently reverting to the pre-devaluation rate.?J The Central Bank does, however, appear to have related its redis- counting to the change tn reserve requiremen ta. Y The September devaluations may also h9.ve occasioned trade and balance of payments movements in those months whose domestic effect was deflation- ary t even though for the whole year 1949 there was an overall balance of pqy.ments surplus. 21 !::J PER CENT CHANGES . First hare 30 8 June to Marcb to Whole year months 30 30 ~Jl. 1948 , 1942', 1,950 1948-49 1949-50 1950 Money supply ••••• t • 112.4 .;. 7.7 /-14.7 112~,6 .... 2.9 113.8 Commerci al bank domestic credi ta .. f16~3 ';'19.7 /-17.1 116~1 I- 7.1 f13!'0 Central Bank cre- di ts to other banlts ~' •........•, ~. f 5. 4 t, /47.8 f15~O f43~,O 135.5 t 1 ..6 Source: Calculated from IFS •. I  - 26 - Th~ oonclusion tl1us seems justi£ied that while there is now possi- bilityof improved controls, both quantitative. and qualitative, of' commercial bank credit, .the methods. are so new in Peru that their use islike1y to suf- fer from inexperience, both in prompt formulation of policy and in adminis- tration. 2. Ext.ernal (a) Overseas Trade Peruvian exports are more diverse than those of other Latin lunerican countries, although all export products react with notable similarity to the vicissitudes of world raw materials markets. In no case is Pex'll a dominant contributor to world supply. EXPORTS Value Main markets (million U5$) a/ -.-__P_e_r-.,;..c....;en:;;;..t~-...._ . (Latest year, 1~ Commodity 1939 1948 194~...J 1~39 l~48 1949 or 1911-9) Cotton 14.2 42.$ 46.4 19.8 26.4 29.9 1949: Europe 451~, U. s. 257°, India 7%, L.A. 20%. Sugar 7.7 35.0 10.7 21.6 16.4 1948: L.A. 65%, U.s. and Japan, 15%. Petroleum 20.8 28.9 23·3 29.0 17. 13 15·0 1948: L.A. 130%, Europe l~,b. Lead 4.5 14.6 14.5 6.3 9·0 9. 4 19 \'(:1 • ,. ,\ . '"+O •. .I.J ..... 2(101. 0/0, U.S. 63%. Europe 9'Jb. Copper 7.6 9.7 18.• 7 4.7 6.3 1949: U.S. 82".k. Zinc 6.0 7.7 2.6 3.7 5.0 1948: Canada 25%, U.S. 33%, Europe 41Jb. Other 9.2 28.0 lc;~8 16.9 18.0 Total 71.7 155.1 100.0 100.0 100.0 1948: U. s. 25%,· Europ~ 2Cfj~f L.A.- J4(Jfo. !!l Calculated from trade statistics in soles, and liable to error due to 1949 exchange mixing sj'stem. Source: 1939, Anuario Estadist~co del Peru, 1939:; 1948 and 19491' Banco Cen~ traJ. de Reserve. del Peru, April 1950.. Market data. chiefly from U.S·. Foreign Servl ce Reports .. or U.• S.. and U... K. import dat44  The major agricti1tural eXports, sugar and cOtton, together account for some 5~ of postwar exports by value; mineral exports; of which petroleum, copper and lead are the most lIilportant. comprise about 30%. In terms of volume t there has been no marked growth trend. in any itel1l other than zinc, and petroleum has shown significant diminution. EXl?ORT VOLUMES (thousands of metric tons) Year Cotton Sugar Petroleum Lead Copper Z:.l.nc .. 1939 •...•. 0 • • • .. 77 277 41 35 17 1948. . . . . . . . . . . . 52 369 46 18 47 1949..• 0 •••• 0 •• • 56 282 53 28 60 Source: Boletin del Banco Central. Wartime restrictions on non-food crops reduced acreage planted to cot- ton and prewar cotton production has not since been recovered, Domestic con~ sumption of sugar is steadily increasing; in 1948 it was about three times the level of 1929, and took around 40% of production. Since both cOrJIllodities depend heavily on irrigation, future production growth is primarily restricted by area of irri~ble land. In the case of cotton there may, however, be op- portunities for improving yields, and some displacement of food crops is also pOSSible, although not necessarily desirable. Petroleum exports have fallen partly because of some fall in produc- tion but primarily because of increase of domestic consumption. Unless petroleum production can be increased Peru may in the foreseeable future be- come a fuel importer~ . The difficulty resides in promulgation of an accepta- ble petroleum code (towards which some steps have been taken) and also in  .... 28 ... revision of domestic prices for refined products. whioh have long been con- trolled at a low level. Drawbacks of primarily politioal nature have applied to production of other minerals following peaks achieved under the impetus of war, although substantial development of lead and zinc production since the war resulted in record output of these metals in 1949. Lead has displaced copper as leading metallic e~ort by value during the last three years, and is likely to retain its pl'e-eminence if relatively large known lead reserves are tapped • .. The make-up of imports is shown in the following table. It is noticeable that the reduction since 1925 in the relative importance of some consumer goods (textiles. paper, ceramics, and other) has been PERcnrrAGE DISTRlBllTION OF V.A:LUE OF IMPOmS Commodity 1925 1940 Macbiner,y and vehicles ...... .............. ,. ~ 15.3 20.3 21.5 Food product s .................... 'e • • • • • • ,. • • • • 23·9 12.0 24.6 Metals and manufactures ...•..••.••.••.•••. 12.1 14.5 10.3 Textiles and manufactures •....••..•.•...•• 17.3 15.3 9.5 Chemicals and pharmaceuticals q • • • • • • • • • • • 7·3 15· l ~.l Paper and manufactures .•.....•....•. ~ .•..• 3.2 3.1 2.6 Ceramics (earth, stone, glass) ••.• '•••• '•••• 2.3 2.5 1.9 Tobacco and manufactures ...•.... '•••••••.. ,. ·3 .6 ..................... . Bevera.ges •... ,. ............ " .1 .5 .2 Others .......... ,. '."........... '~ .. -. . '. '! . . . . . . . '. . . . . . . 17.9 15.8 13.7 Total .......-.•. .,., ................. -.,.,.> •. .•• -. 100.0 ~- 100.0 100.0 Total in millions of dollars .•..•.. * , n 161.1 Source; Division of Economic Research,Pan American Union, liThe Peruvian Economy.. tI  .... 29 - accompanied by expansion of machine.ryandmanufactures. The growth of food imports lnthe last decade Y is also very noticeable.. The geographical distribution of total trade since 1937 reveals some displacement of the United Kingdom by the United States, and of Germany by Chile. as export destinations; as a source of imports, the United States has steadily increased in importance at the expense of Germany while the United Kingdom and Argentina have virtually remained constant. PER CENT OF TarAt EXPO.ItrS PER CE.NT OF TOTAL U:PORTS 1937 1948 1949 1937 1948 _..1:949 Uni ted States 22 25 29 United States 36 54 63 United Kingdom 22 14 16 15 Germany 20 10 -- 1 Germany 1 United Kingdom 7 9 Chile 6 19 17 Argentina 8 18 5 S0urce~ 1MF, IIInternational Financial Statistics, If Country Notes. The recent distribution of trade suggests that Peru will experience currency difficulties so long as l!hropean currencies remain inconvertible ~ y PRINCIPAL IMPORTS OF EOODSTUFFS : i Volume Value (thousand metric tons) (U&$ mUliens) Commodity I 1939 1~8 19~9 1939 1948 ':'.1b.eat and wheat flour 120.9 150.6 21~.0 2.4 25.0 Milk, evap. & condensed •. ~ 4.9 3. 4 .4 .7 1.1 Pprk lard ...... ~ .. 2.3 1.5 Meat and meat products .. , Rice ...... , .. ,., ............ f ••• , ..... .. .3 21.0 14.0 5.5 2'.G 15 .l .8 5. 4 1.4 ... .... ..... " All other ." , " 21.6 20.9 22.8 1.8 10.4 ... ............... ... ~~. Total " ~ 16807 196.7 262.1 5.8 44.8 Source: Data supplied to the Mission by Direccion Nacional de :C;stadis- tica. Dollar values obtained by conversion at official rates of values given in Peruvian soles.  - 30 - Within her overall trade deficits, she has been earning dollaJ:'s from BoliVia, Chile, Uruguay and Venezuela, which have ~l'tiallY financed her imports from the United States. DISTRD3UTION OF TBADE (US$ millions) Western Hemisphere U.S. Total Europe Other Total 1948 E:x;ports f .o.b" 39.9 104.~ 46.6 11.5 162.4 ---- . Imports c.ioI. 90.8 134; 24.7 8~4 167.7 . Balance -50.9 -30·3 1-21~9 I- 3.1 - 5.3 1949 Exports f!o.b. 45~3 9~.5 47.9 9·8 1?7¥2 - - Imports e.i.f. 105.~ 12 .5 35.5 7.1 Ib7.1 Balance -60.0 -25.0 t12.4 I 2.7 - 9.9 Source: Direction of International Trade. In the modern world, the currency earned by trade rray depend .as much upon the commodity concerned as upon the direction of trade. A chec~ by thi s method, however, indicates a hard-currency earning capacity, perhaps a little smaller but not greatly different from that indicated by exports to the ~estern Hemisphere. (b) Balance of Payments A noteworthy feature of .the Peruvian balance of payments is its continuous approximate overall equili brium.~ Over the war end postwar period, exchange reserves have shown greater steadiness than most Latin American Y Taking as hard~currency earners all. Illineral and petroleum exports, 75% of sugar exports ap.d, 201~ of cotton exports, plusone-th~rd of other ..  -31- countries.!! It appears as if Peru simply imports to the limit of exchange receipts less other requirements in each period. During the period 1945-1949 this resulted from quantitative exchange and import controls (with a partial deval-wation of the sol from September 1948) which succeeded in restraining total imports to exchange availabilities. In November 1949 the sol YJas de- preciated, and coutrols reduced to enforcement of a prohibited list f~~ 1m- ports utilizing hard currencies. In 1947 a US$ 20 million trade deficit replaced the customary sur- .. pluS, but was offset by private capital movements; exchange reserves increased US$ 3.1 million. In 1948 a trade deficit of US$ 5.3 million included in a balance of payments deficit of about US$ 8 million, was again accompanied by an increase of exchange reserves of about US$ 8.5 million, owing to other com- y pensatory finance. In 1949 there was a balance of payments sur-Plus of US$ 5.8 million (despite trade deficit of US$ 9.9 million). GROSS GOLD AHD EXCFAJJGE HOLDINGS (US$ millions) Year Amount Year .Amount 1937 1946 ."." ............... . 1939 ·...................... . • ... " . . . . . . . . !t . . . . . . . . . . .. 1941 ..... " ... ,. ............ . · 1941 '" ... ,.. ............... . 1945 · .................... . ' 1948 .. ,. ""... "... '* •• 1950 It . . . t (July) • ~ •.....•• It !I This figure does not reconcile with the 1949 change in holdings shown in balance of payments statements. Source: IFS. gj A loan of US;;5.6 million from the International Petroleum Company, de- ferred.payment of US$ 10.. 9 milliop. of imports. and a credit from the Argent~ne. .  -32 - Total import levels are thus apparently flexible. There are, however, two modifying considerations. Firstly, this flexibility may in part reflect the present rate and nature of economic development in Peru. O~tGide the category of foods, manY present imports may be postponable, whereas once the economy is gea.red to higher levels of equipment and raw material imports the compressible margin will decrease •. Secondly, the overall figures conceal the difficulties resulting from currency inconvertibility. In 1948, for example, the increase of exchange re- serves was in sterling and other compensatory finance was necessary to j cover the hard currency deficit. The 1949 balance of payments surplus pro- bably resulted more from inability to spend soft currencies than anything els.e. The year closed wi th a lengtby prohibited list in force against imports from the United States, and no restrictions against sterling import.s, a situa- tion still obtaining. Direct investment income remitted represents a sizeable amount, the annual average 1946-1949 being US$ 12.8 million ande~ceeding average ne\'Il di- rect investment inflow over that period by US$ 5.0 million annually. ~,lore­ over, new direct investment has fluctuated considerably, being (in US$ mil- lions) 5.6 in 1946~ 14.9 in 1941. 8.3 in 1948 and 2~5 in 1949. (c) Exchange Bates and Policies The then existing rate for the sol, 6.50 to the United States dollar, was declared official parity in December 1946~ SUbsequently the legal free rate applying to certain authorized transactions steadily depreciated, reach- ing 20~43 in July 1949. In September 1948 acertif~cate system was instituted. leading to  - 33 - multiple effective rates for both exports and imports. Exporters received part of their proceeds at the offi ciel rate and part in negotiable certifi- cates. Private importers were required to present certificates to obtain ex- change, and also to pay a surcharge for Groups B and C imports. Group D. or luxury imports, paid the free rate and a higher surcharge. The system was varied from time to time, partly to ease export difficulties and partly to in- fluence imports. Y The effect was a gradual de facto devaluation of the sol. The effective rate for commodity exports fell from 6.50 before September 1948 to an average of l3~6 for 1949. ~antitative import licensing had been instituted in 1945. It was the impression of the 1948 Bank Mission to Peru that import licensing was then operated (before introduction of the certificate system) was inefficient in administration and lacking in policy. The only criterion appeared to be protection of working exchange reserves. Imports were in fact held near total available exchange, but the composition of permitted imports did ~ot appear to correspond to production end investment requirements, Following recommendations made by the Klein 1'~ission, a system whereby all transactions are conducted at fluctuaiiing rates of exchange was in- stituted in November 1949, the par value of 6.50 no longer being applied to any purpose. No new parity has been proposed. All trade transactions were con- ducted at the certificate rate, exporters receiving negotiable certificates for aU proceeds and importers presenting certificates for required ~xcha.nge~ All import controls were removed, except for a prohibited list against ha+d- currency imports. Such import controls as rema.inconsist only of changes in 1/ A detailed historical account is given in the September issue of Inter,... - national Financial Statistics, Country Notes, Peru.  - 34- the probibited list, which does not apply to any currency declared surplus. As a result, the certificate rate fe~l from 19.04 in September 1949 to 14~20 in March 1950, and then rose gradually to 15020 in September 1950, wi th corresponding movement in the free rate. The ,ilOV6ment has been accom- panied by some decline of exchange reserves, probably arisiLg principal.ly from free utilization of sterling which bad been declared surplus. (d) External Debt Peruvian external debt in mid-l950 totalled US$ l2l.7 million dol- lars (US$ 114.0 million in dollars), as 'shown in the table below. Apart from the bonds, whose default settlement \"las unilateral, 1/ two other items call for some comment. A recent Eximbank credit for US$ 20 million to Cerro de Pasco for construction of a zinc refinery will probably be utilized or~ to US$ 15-16 million; negotiations are not yet complete. Secondly, IBRD bas no information upon the service terms of the US$ 18.9 million Argentine 1947- 1948 oredi t for foodstuffs. EXTERNAL DEBT OF PERU (in thousands) Amount Outstanding Currency Expressed nate of payit. in US\? Dollar ;Debt Total dollar bonds ...•.•..•.•• (6/30/50, 12/31/49) $ 70,261 Total U.S. Government debt •... (9/30/50, 6/30/50) Argentine credit for foodstuffs ........• 1947~8 ... ....... . " ., 24,799 18,893 Total dollar debt ...... .,., ~ ..... " ........................ ., ............................ . $113,953 Sterling Debt •.............•....••....•.• 12/31/49 Sterling bonds (not converted to Series E $ bonds) .••.. , ......................... ~ .• .;L 2,298 $ 6,434 Guano loan 7-l/2jIo, 1922-48 ......... 12/31/49 •. .;L 470 0 •• 0 1,316 Total sterling debt ................................................. . $ 7,750 Total Debt ............... '- . , ... , ............ <l ................ . $121,703 !I External debt history is discussed in Appendix V.  - 35 - As a.t September 1,1950,. 62% of .defaulted dollar bonds had. assented 1/ to exchange into new Series A to D dollarbonds~as shown below.- =====::..=:==================::-:-:. ----- US$ mill~io~ I'k:>llar bonds outstanding a.t ~iroe of 1947 offer •. ; ...... . 76.5 Not assented to offer, at face value •..•..•....•.•..••• 29.1 29.1 Assented . It ~ ...................... ~ ..................... ................... " •• 4f.1i" SUbsequ~ntly retired ..... '.................................. ~ ... " .. , .. . 9.6 O\lt stan.ding ................ ., ................................. '" ......... ~ . ., . Sterling bonda under offer to exchange into Seri~1 E dollar bonds t at face value converted at 2.80 -- .••••• 6.s --""-- 73.7 ~ At timebf 1947 offer, sterling bonds amounting to.;t 2.44 million (US$ 9 .. 8 mUlion at 4.01) were outstanding. At December 31, 1949, only ~ 144,900 (5.9%; US$ 0.58 million at 4.01) bad assented to exchange. The British Bondholders Council have objected to the January 1950 modification altering exchange basis for principal amoUllts from 4.01 to 2.80 conversion rate. Estimated service payments upon present external debt are sl'.own in the following table. It should be noted that; (a) Service upon bonds is based upon the present offer. Modifica- tion to obtain consent of the bondholders councils would probably add US$ O.g million annually. (See Appendix V.) not (b) The table does - -. include service upon the Argentine food- stuffs credit. (c) The table assumes that Cerro de Pasco will utilize the whole of the recent US$ 20 million Eximbank credit, although information from the borrower suggests disbllrsemellts will be less than this. !I Latest information is that 66~ had assented as at December it 1950.  ESTIWlATED DEBT SERVICE (00$ millions) Dollar service : .Total service Period Amortization Total Amortization Total (~year periods) 1952-1956 .....•••..••.• 8.°5 22.63 9.15 22.~O 1957-1961 ...••...•.••.• 17.~7 28,23 17.68 28. 1 1962-1966 ••••.•••....•• 15.68 21.67 15.68 21.67 1967-1971 •.•.••..•••••• 10~73 13.15 10.73 13.15 (10-year periods) 1952-1961 ~ .......... q26.42 • 50.86 26,83 51.31 1962-1971 .............. 26.41 34082 26.41 3,+.82 !. Total t 1952-1971 .••....••• 52.83 85.68 53.24 86,13  O. CBEDITWDRTffiUESS 1. Present External Position Despite the present ~owlevel of service upon Government debt rela- ti ve to total exchange receipts. new lending to Peru involves considerable risk. The external. risks arise from the following considerations: (1) The physical diversity of Peruvian exports is greater than that of other Latin American countries, but does not really carr,y any greater prospect of e~ort stability, Prices of non-ferrous metals are likely to move roughly in step as one group; cotton and sugar are vulnerable in the longer run, and exported petroleum may steadily diminish in volume unless new fields are successfully developed. (2) There is no clear prospect of spontaneous growth of export volumes • . (3) Although p.J;'6sent total. service is low in relation to total ex- ports, it is almost wholly in dollars, whereas only some 30% of exports go to the United States, Service on dollar debt is a very high percentage of ex- ports to the United States (aroundl~b), and if assessment be made on this basis alone, no creditworthiness for dollar loans remains, Dollars are,however,at present earned outside the United States. On this baSis, dollar debt service£aUs to around 6% of dollar earnings, a  -38 - figure more in line with Latin American atandards, The acceptance of this basis t however, involves assumptions . regarding the probability that dollars . will continue to be earned in Peru l s t,rade with Latl,n America (as well as the United States) t or in general trade (inclucting European) fo.r some e;tports such as non-ferrous zuetals. (4) Direct investment income remitted from Peru is high (7.1ib of to- tal exports) and on average over the past four years has exceeded new direct investment by US$ 5 million annually. ,Special allowance must therefore be made for this in the Peruvian case. Total investment income and service then rises to around 9fo of total exports, and 12% of dollar earnings. (5) Not until the mid-1960's does service upon existing debt diminish significantly. Present amortization averages only uS$ 1.8 million 1952-56, and US$ 3.5 million during 1957-61. There is thus no material possibility of loans which would be of useful s1 ze but not increase future total service bur- dens, The table on the next page shows the stati stical background to the preceding discussion. The external position does not disclose a safe margin of unexhausted creditworthiness. Peruvian creditworthiness therefore becomes a matter of urogram cre- ditworthiness, in the sense that the effects of investment become of central importance. This raises the. internal risks involveq in establishing and exe- cuting a program, the economic aspects of whic4 are discussed in the next section on '!Programming Possibili ties. If  - 39 - SERVICE BURDENS (US$ millions) _ _·. . ,.vVe..,.,.s. ;. tem Hemisphere__ All currency USA Total areas Two-Year Averages (1948-49) Exports f .o.b. ........... 42.6 101.9 159.8 Exports. plus balance upon non-trade current account n.a. n.a. 166.4 Direct Investment: Inflow ~ ................ . Income remitted ••••.••• r( Debt Service E.I 1952 ........... "... ~ ..... . 3. 4 3.5 1956 (peak year) ••••••••• 6.0 6.1 1952-56 average ••••••••.• 4.5 4.6 1957-61 average ••••.••••• 5.6 5.7 1962-66 average ••••••••.• 4.3 4.3 Per~entages c/(upon 1948-49 exports) Debt Service: 1952-56 average •.•••.•• 10.57 (12.44) 4.42 (5.20) 2.88 0.38) 1956 (peak year) ...•.•. 14.10 (15096) 5~89 (6.67) 3382 (4 c 31) 1957-61 average •••••••. 13~15 (15.02) 5.49 (6.28) 3.57 (4.06) 1962-66 average •••.•••• 10.09 (11.97) 4.22 (5.00) 2.69 0.19) Amended Debt Service plus net di rect in-2:/ vestment payments: 1957-61 average •••••• 29.13 12.16 9.38 ~ Estima.ted. El million On basis of present settlement offer. Its amendment would add about US$ 0.8 to figures shown. c/ Percentages in brackets include US$ 0.8 million additional service upon an ~ amended bond $ettlement, 2J Future annual averages assumed to be (US$ millions) U.S. Total Income remitted •••••.••• 10.0 New investment iQflow •.• Net payment •••••.•••• -4.0 6.0  -40- 2.. Progranming Possibilities From the economic point of vieT'1, proper development progr~ng would carry advantages in Peru as elseVihere; improved resource utilization should re- sult. But in Peru programming is likely to encx:)Unter difficulties w:b.ich are absent or less intense in countries such as Chile. The structural difficul- ties of the economy itself limit effective action. They cannot be overcome quickly, however enlightened the program, although their recognition ana. un- derstandi~g should hasten their dissolution. There is likely to be an initial absence of data upon which fully to establish a program. Technical assistance in establishi~g objective sector programs may well be required, while pancl ty of national income data T.'N3¥ re- strict quantitative development programming to the approximate or partial ap- proach. This does not mean, of course, tbat the program approach is prevented, but that in the beginning the framework will be ganeral rather than detailed.!! The framework could be fairly rapidly filled out if the Peruvian Government recognized the importance, even for its own purposes, of the type of technical and economic i~ormation required. Here, however, political con- siderations begin to be relevant. Ideally, the Government should understand and accept its executive economic responsibilities, and not merely seek more Y The Klein Mission did not t)'Tork upon development problems as such, and has not in fact produced a report. It was not,that is, a general econo- mic or development mission, and 1 ts reporting was current and by topics. From September 1949 through April 1950 it addressed forty-nine communi- cations embodying recommendations to Hini sters. Its work continues, al- though apparently at lesser intensity· and concerned primarily with im- provement of fiscal administration; recently it was reported that the Mis- sion was requested for assistance in formulating a program for improve- ment of port's. .  ;... 41 - or more rapid construction of major public 'Works as a monument to its admiI".i.s- tration. Even with the required framework of programming reasonably complete, it may not be politically (or eve~ a~nistrativelY) possible for thePeravian Governr(lent to adopt the general economic pOlicies which seem best designed to speed development. A politically and socially realistic program, that is, may fall short of full economic potential. The economic forfeit to achieve realism should, however, be truly justifiable and minimal, and this might be better assured if the examination of facts and alternatives were centered in & re- spected ad hoc body of the type of the Colombian Economic Development Commi t- tee. Certain required characteristics of a Peruvi an develol?ment program al- reaqy seem apparent. The initial objectives should be fairly restricted; nei ther Peru's credi t\'lorthiness nor her domestic resources "fill permit high levels of net'l investment. They should probably also be restricted geographi- cally, envisaging regional development rather than simultaneous overall national result s. The general tenor an.d philosophy of recommendations made by the Klein Mission has been reliance upon private ini tiati ve and removal of official con- trols. This trend, which in Peru is likely to be 'beneficial, should 'be recog- nized in a development program. Private investment initiative should be en- couraged, an.d controls siwp:::'ified. Special attention, h01.'!ever, 1.'.'ill be neces- sary in credit control, to avoid heavy inflation "1. thout har.apering pI'oducti ve investment. Both the internal and external positions indicate that Peru cannot  afford to commit a tign proportion of in~e6tment resources to prolonged con- struction projects. The investment program shoUld therefore include a fairly high proportion of short duration projects leading to quick output increase. • The balance of payments position requires that a development program make every effort to strengthen the external position, again as quickly as possible. For developmental purposes, however, export improvement differs somewhat from import replacement. In the Peruvian case, as has been seen, export production directly affects only about 6% of the occupied populntion, and is of a nature (m.\ning and intensive agriculture mainly upon large hold- ings) doing little itself to stimulate ancillary or coruplementary investment. Unless the growth of exports provides net exchange receipts to Peru in addi- tion to service upon the original investment, there is no gain for finance of subsequent development. Efficient import replacement, on the other hand, not only directly increases the total of available goods in Peru, but is more likely to liberate additional investment opportunities cumulatively adding to complementary economy of domestic production. Careful balance of such considera- tions should be sought in a Peruvian programo Any programming in Peru should be undertaken as a first conscious step towards sounder development, leaving for subsequent programs the things that can more readily be done later upon the foundations leid by the first pro- gram. Peru r it must be remembered, is at present less highly i.ntegrated and developed than Chile or Colombia, and the visible results of an initial pro- gram will be correspondingly smaller.  (a) General Ass~tions (1) Creditworthiness for new lending depends upon the future effects of investment rather than upon the present balance of payments Position. Y It • is therefore assumed that development policies will seek balance of payments improvement, both in e~ort promotion and import reduction. (2) As a corollary, it is assumed that pollcies will minimize future inflation. It should be possible to achieve reasonable internal fine.ncial sta- bility with more effective developmental inyestment. This may, houever, en- force postponement of eJISnsive projects of long construction p.;riod. (3) An important but seemingly justifiable assumption is that Peru will continue to earn dollars 1n trade outside the United States so long as EUropean currencies remain inconvertible, so tr~t 6o-6?fo of her total exports are dollar. The risk here may be envisaged either in terms of the probability of Western Hemi~ere trade remaining wholly dollar, or that certain exports, wherever sent, will· . earn dollars. (4) It is assumed (probably fairly conservatively) that new direct 1n- vestr.cent inflow will average at least US$ 5 million annually, 80% in dollars;} (b) Conclusions From these assumptions, and the preceding analysis, the conclusion emerges that new lending to a total of US$ 50 million equivalent over about Y Underlying this are expectations that (a) no significant long-term growth of earnings from cotton and sugar can be foreseen, (b) growth of mineral exports and arrest of decline of petroleum e~orts ~ill both require heavy investment) 1f..hich, even if priVate, itself becomes part of future develop- mental investment requiring suitable policies. Possible present post- Korean price gains are thus treated as short-term windfalls .. five years could be undertaken in support of a program designed in :r;art to im- prove the balance of pa;yments position. No more than uS$ 25 million, h.owever, should be in United States dollars unless specifically directed to improvement y of the dollar sector of the balance of payments. The rate at 't'lbich new Bank lending could be absorbed without inducing inflation will depend principally upon the budgetary posi tion. Indications are that an absorption rate of uS$ 10 million a year is as much or even some- what more than can be foreseen at this time~ The recommended present limit for new lending should therefore be suf- ficient to offer maximum prospect for sound and balanced investment wi thin the abilities of the Peruvian economy. Y The service implica,tions of new debt totalling US$ 50 million, of wbich US$ 25 million are in dcllars, are sho\"1O in the foli01'lTing table; new ser- vice is calculated at ~ interest upon loans repayable over twenty years. == _ _ _ _ _ _ _....-___w_e_stern !-Iemisphe~_-,,(_d()_l_]_,ar_s:-)_____ _ __ To_t_Bl uS$ per uS$ per millions cent millions cent Average exports, 194B-49 101,9 100 160.2 100 1957-61 averages: Service on: ~ Present debt •.•.•.•• 604 ~ 6.28 6.59:J 4.05 Nev.; deb t .............. ~ 1.9° 1.86 3.9 2.43 B·3 B.14 10.4 6.48 Net direct ~vestment p~ents ..•.. ~ ••• ~.t • • 6.0 5.89 8.5 5.30 14.3 14 . 03 18.9 11.78 !I Including amended bond settlement. EI Assumed" Ei Principal. uS$ 25 mi11~on. in doll~s. # Principal, US$50 million, in all currencies. t, e .•,t, , 4,. ,.( ., ; 1Lf.I,i't i i. t ,  APPENDICES I. cotton in Peru II. Sugar in Peru III. Peru--Trade in Hetals and Ores IV. Peruvian Petroleum. Development V. External Debt History Prepared by: I and II -- Paul F. Craig-Hartin III and IV -- Samuel Lipkowitz Charlotte Hillenson V - James J. Lynch  CONTENTS Page I. COTTON IN PERU Conclusions • • • • • • •• .............. . 1 1. Cotton Production • • • • • • • • • • • • • • • • • • 2 2. Consumption of Cotton • • • • • • • • • • • • • • • • 3 3. Exports • 0 • ·.... • • • • • • • • • • • • • • 0 4 II ~ SUGAR' IN PERU Conclusions ••• • • .. • .. • • .. • .. • • 0 .. • , 0 • • • 6 10 Sugar Cane Production • • • • • • • • • • • • • • • • 7 2. Sugar Production ••••••••••• 0 • • • • • • 7 3. Consumption of Sugar and By-Products • • • ' 0 • • • • 4. Exports .. . .· .. • • • • • • • • • • • • • • • • • 8 9 III. PERU--THADE IN METALS AND ORES Conclusions • .. • • • • • • • • , • • • • • • • • • • • • 11 1. Backg~ound. • • • , • • • • • • • • • • • • • • • • • 12 2. Production Prospects • • • • • • • • • 0 • • • • • • • 12 3. Mineral Exports of Peru-,...Past and Present • • • • • • 13 IV. PERUVIAN PETRO LEUl,1 DEVELOPMENT Conclusions ••• 1. ·..... . .. ... .. ..... Background. • • • • • • • • • • • • • • , 15 17 • • • • • • • Production • • • • • • • • • • • • • • • • • • • • 17 Trade .. • • • • • • • • • • • . . ~. • " fit, • • • • • • 17 Reserves . . . " . . . . . . . . . . e. • • '! • " • • • 17 Government Controls • • • • • • • • .. • • • • • • • 18 2. Future Prospects . . . . . . . . . . . . . ~ •••••• 18 Concessions • • • • • " • " • • • • • • • • • • • • 18 Price Problems ••• • • • • • , • • , • • • • • • 19 Foreign Hark~ts • • • • • • • ,. ,. • ,. • • • • , • • 19 v. EXTE..ltNAL DEBT HISTORY · . . . . . . , . . . . ,. . . . . . . . 26  APPENDIX I COTTON IN PERU Conclusions . (a) Little expansion in the cotton production area is likely in view of the strong competition for irrigated land, the difficulty of e.1:tend- ing the irrigated area and the major problems presented by development east of the Andes. Some increase may occur as a result of improved cultivation praotices but this would not be very large and would occur slowly. (b) Exports of cotton are not likely to exceed current levels of about 200,000 and 25o,000 bales of 500 pounds gross (45,000 to 57,000 metric tons) owing to difficulties of expansion of production and to increasing domestic consumption. (c) Exports are likely to continue to find their main markets in the United Kingdom, Continental Europe and sterling areas of ~sia. Exports to Latin American countries should be maintained but are not expected to increase significantly. ~~orts to the United States are limited by quota, which is not likely to be increased. (d) Foreign eXGhange earnings should be maintained at 'Nell above the 1949-1950 season I s level during the next fe"T years and should be mainly sterling.  - 2 - 1. Cotton Production Peru occupies ninth place among the worldls cotton producing coun- tries. Most of the cotton in Peru is grown in irrigated valleys on large absentee-O'-med haciendas. The cotton farmers are reportedly not very effi.... cient but enjoy excellent climatic and soil conditions for their crop together with fairly abundant cheap labor. The area-planted to cotton in Peru increased steadily be~veen the Wars, except for a brief .set-back in the depression years; in 1938 tne planted area was 191,000 hectares. Following the loss of Peruls export markets on the outbreak of World Viar II, the United states entered an agreement with Peru to take all Peruvian cotton exports subject to a re- duction h the area tmder. p.c'oduction. In the last years of the war and the immediate postwar yeQ!'s food shortages caused the Peruvian Government to impose further restrictions on the area under cotton. At the present time there are no acreage restrictions on cotton in Peru but past restrictions combined with relatively low prices for cotton during the past tv,o seasons have kept the area under cotton from recovering to prewar levels; the area planted averaged 151,000 hectares between 1940-44 and only 135,000 hectares between 1945-49- During the season 1949-50, the planted area was only 120,000 hectares but the very low acreage was partly due to a lack of irrigation water. Cotton production in Peru is almost entirely confined to some twenty irrigated valleys on the Pacific side of the Andes. It is reported that there are large areas of land on which cotton could be grown on the Eastern slopes of the Andes, at the head of the Amazon basin, but lack of transpor- tation has been a primary factor hampering the development of this region .. The irrigated area in the valleys of the Pacific Coast, in which sugar and cotton are the two major crops, cannot be materially increased except at heavy expense. Thus, it appears that any recovery to the prewar planted area or expansion above that level can only occur as a result of a shift be- tween crops.. The expansion of the cotton area between the wars was al.l'1ost entirely due to a substitution of cotton for sugar; over the next year or two relatively high prices for sugar should limit any shift into cotton. The main type of cotton grown is Tanguis; this variety was intro- duced in 1918 and now accounts for about 90% of the total cotton crop. The next most important type is Pima which accounts for 8% of the crop and is grown almost exclusively in the north. Both varieties are long staple cot- ton but, while Pima has the longer staple, Tanguis has a vfhi ter color and a special springy quality_ 1/ Yields per hectare of Tanguis are be~feen 20% and 28% greater than any o~her variety grovm in Peru. Plantings take place from November to April, coinciding with the flood period oftha rivers, but in valleys watered by permanent streams the cotton is planted between September and November. Production of three or four crops is obtained from one plant- ing, the plants being cut back to the ground after each crop. The growing season is not precisely defined nor uniform; picking is in progress in some ];/ Valued in the manufacture of tweeds and asbestos.  - 3 - locality during practically every month of the Jrear but the bulk of the crop is harvested between April and July. l~lthough climatic and soil conditions are generally very favorable for cotton in Peru, lack of adequate rainfall restricts production to irrigated areas. Irrigation water has become in- creasingly scarce but many irrigation technicians consider that much of the water used on cotton fields is vTasted with bad effects on the soil. Guano from neighboring islands is used as fertilizer. In spite of a declared shortage of irrigation water and no material increase in fertilizer use, yields have increased from 445 kgs. per hectare to 455 kgs. during the past decade. Some of the increase in yields is due to genetic selection of varieties and coo~dinated control vf insect plagues in entire valleys but some can be attributed to the contraction of the cotton area which results in the retention under cotton of the higher yielding land. Under a SCIPA program experiments have been undertaken in the Camana valley in southern Peru to encourage farmers to adopt L~proved practices. The Tanguis variety of cotton is generally grown in this area and the plant fully occupies the land for three years. Last season two field demonstra- tions were conducted in which Pima and Sokol varieties were grovm. They ma- tured in tfule for the ground to be plowed and planted to potatoes or beans; in November 1949 about 500 kgs. of Pima seed were distributed to Camana val- ley farmers to replace the Tanguis cotton formerly grown. 2. Consumption of Cotton Domestic consumption of cotton has been increasing during the past quarter of a century. In the early thirties, about 10~ of the cotton pro- duced in PerU'ivas locally consumed but by the early forties the proportion had increased to 15% and has recently been about 30%. However, owing to the reduction of production in the past decade, these figures do not indicate the true rate of increase in consumption I'lhich doubled in the thirties but only increased by 50% in the forties. If do~estic consunption continues to increase without a recovery in production, Peru will be faced with the loss of her important position as fifth worl~ exporter of cottop; production, however, is unlikely to increase except at the expense of food .crops .. The manufacture of cotton textiles for the domestic market has be~m Peru's leading industry. These are fiv-e cotton spinn;ng mills and eleven textile factories situated mainly at Lima but also at Arequipa} Cuzco, lca and Sullana. The number of ~ooms totals about 5700 and tnere are about 125,,000 active spindles. The main goods produced are "tocuyos,fl drills and vichys, In addition to the domestic manufacture appreciable quantities of cotton fabrics are imported into Peru; in 1947 these imports were valued at 16 million soles, mainly of finer grades, and represented about 10% of Peruvian consumption of cotton textiles~  - 4- 3. Exports Peru is the world's fifth largest cotton exporter and the third largest in the k~ericas. However, since Peru produces only extra long staple (Pima) and long st,aple (Tanguis) she comes into competition T:1ainly with Egypt and certain British Colonies in those staple lengths. In the category of cotton over 1-1/8 inches Peru accounts for a little over 10% of world production, against only about 1% of world production of all sta- ple lengths. The cotton trade of Peru is tied more closely to sterling than to the dollar. Before the war the principal markets for Peruvian cotton were the United Kingdom, Germany, Belgium and the Netherlands. During the war the United States increased her imports because of the agreement between the two countries. Several South American countries also increased their ~n­ ports, particularly Ch:i.le and Colombia. Since the war the recovery of the • European market has been slow. By 1949-50 continental European countries accounted for about 26% of the total exports com:t:ared with 4<:% prewar. The United Kingdom's share of the Peruvian market in 1949-50 was 30% of the total compared with about 48% prewar. India, a sterling area. country, has entered the Peruvian market. Before the war India I s share of the market. was negligible, but since 1947 her share has increased steadily and in 1949-50 accounted for 14% of the total. India has the manufacturing facilities for long staple cotton and has purchased Pima cotton in an effort to improve its cotton fabrics. Import quotas limit entries into the United States and importers are only interested in top grades. India, the United Kingdom and Belgium now account for three-fifths of Peru fS cotton eX"'~orts. ];/ In-·:view of the high export taxes 2/ on cotton, under which producers claim that they contribute a larger p..'""oportion of their income than any other producers or manufacturers, and limi t.ed availability and intensive use of irrigated land, together with increasing domestic consumption, the pros- pects of increased exports above current levels are not bright. Peruvian cotton, being of long and extra long staple, does not enjoy the wide market of medium staple cotton. On the other hand the Tanguis variety enjoys a specialty market as raw material with peculiar qualities. The springiness and roughness of Tanguis-gives it special qualit4es for the tweed and asbestos cloth manufacturer. Pima cotton also has a specialty market for industrial thread and ~ther uses requiring high tensile strength but comes into more direct competition with Egyptian Karnak. !/ See table on next page. ~/ Export taxes have been levied since February, 1947. The tax is applied to the difference between the c.i.f. sales price and the cost of produc- tion as determined by the government.  - 5- Prospects for foreign exchange earnings trom cotton appear to lie mainly in sterling. lt is unlikely that T:1a.terially increased quantities of cotton over pos~var levels will be exported from Peru during the next few years t Since world supplies of long staple cotton can be adjusted re'lGtively quiclcly to demand, prices for Peruvian cotton can be expected to follow fairly closely cotton prices in general. Further, since world prices for cotton are largely influenced by United states action in price support and financing of imports by non-dollar markets,no marked fall in cotton prices below 1949-50 levels is to be expected and re-armament demand should keep prices well above those levels for the next few years. EXPORTS OF COTTON, PERU (thousand bales of 500 pounds gross) 1934-38 1939-43 average , , average 1947-48 1948-49 1949-50. United Kingdom Germany .••••••••• ... 163 90 75 1 53 3 105 0 71 9 Belgiuro/Luxem- . bourg ._ ,._ • • • • • ., It 16 2 29 25 38 Italy , • • • • o • • France .;~,., .... ~." 4 9 3 2 6 0 10 1 5 1 Netherlands &veden 511i tzeriand .......0 ... ., , ... , • • • t2 13 al 0- 4 1 1 18 1 19 6 0 7 2 6- bl Japan o*4t, •• it*, •• 29 59 0 al 1 India • • • United states ... ••••• ~~!' 4 1 al 12- 13 23 . 17 - 5 32 25 Chile ..... Argentina ........ .... ., 1 cl 7- 4 28 6 34 9 4 6 19 Colombia Zcuador ... ........... ,, ~ ~ bl 'hI 14 2 37 6 17 0 14 b/ Venezuela ...... ., 10/ .3 2 0 Y Others .. " , ...... :- 2- 17 .3 ..l1 2 Total • <• • • • • • • 340 228 267 209 2.31 ~/ Less than 500. £/ If any, included in other cotmtries. ~I One year only. Source: U.S. Department of Agriculture. ,I  APPENDIX II SUGAR IN PERU Conclusions (a) Little expansion in the cane production tq;'ea is possible or likely owing to a shortage of available il'rigable land in proximity to the mills. (b) Exports of sugar are not likely to exceed current levels of . between 300,000 and 350,000 metric tons owing to difficulties of expan.... sion of production and increasing domestic consumption. (c) Over the longer term exports of sugar to Latin American coun- tries should be maintained at current levels and might even increase slightly; exports to the United States should fall to about one-quarter of recent! figures, which have been four times the basic Peruvian quota under the United states Sugar Act of 1948; exports to the United Kingdom cannot be expected to reach prew"ar levels, owing to the development of Common- wealth exportable surpluses; exports to all other countries combined should b~ at about the prewdr figureo (d) Foreign exchange earnings from sugar exports should be well maintained and may even increase over the next year or two but a sharp fall in the world free market sugar price may occur shortly there- after. -6-  - 7 .. 1~ Sugar Cane Producti'On Sugar cane is grown in Peru under unusually favorable climatic con~ di tions by a comparat::"vely. small number of efficient pr'Oducers enjoying relatively low production costs. About half the Peruvian sugar industry is owned Qr controlled by W. R. Grace and Company, as producers, millers, shippers, while the bulk of the remainder is owned 'Or controlled by Gildemeister and Company. Cane is grown on fifty large haciendas, which deliver their product to fifteen mills. The area planted does not vary greatly from year to year; during the past decade the smallest area was 47,750 ha., and the greatest area 54,950 ha o , while the average for the period was 50~OOO ha. The esti- mated area to be planted in 1950 is 50,000 hao, the bulk of wh;ich is in the Chicama and Santa Catalina Valleys. The small fluctuat.ions in the year-to- year planted area reflect the limited supply and intensive use or irrigable land within reasonable proximity to ey.1sting mills. Thus" little expansi'On in the production area is likely or possible. The variety of cane grown is P.O.J. 2878, originaJ,ly developed in Java, and under Peruvian conditions is remarkably free from disease and damage by pests. Irrigat.ion throughout the year is essential for best gro~~h. The use of artificial fertilizer, mainly amonium sulphate from the United States, is heavy; during World War II producers tried Chilean nitrat.es but found that under irrigation they raised the alkalinity of the soil excessively~ The cane is planted from October through December and the average period of growth is twenty months, ranging from eighteen to ~fenty­ two monthso liarvesting can be done in any month of the year and approximately 60% of the planted area is harvested annually. . 2. - Sugar Production , There are fifteen sugar mills in Peru. Owing to the practice of continuous harvesting, these mills operate throughout the year, being closed for only a month or six weeks between April and June for servicing and repairing their machinery. The plants are excellently equipped with up-to-date machinery and they are 9perated very efficiently, being virtually all owned or controlled byW. Re Grace and Company and Gildemeister and Company. It is generally reported that Peruvian mills obtain extractions of 94% to 97~~ of the sucrose in the cane. Three refineries operate in Peru and are located in mills so that direct pro- duction of refined sugar is possible at low cost. The production of centrifugal sugar in 1950 is estimated at 475,000 metric tons, compared with 493,000 tons.in 1949 and an average of 44h,000 tons for the past decade. 'lhe bulk of this production is sold as raw sugar and the remainder is subjected to different stages of refinement. About half this remainder is fully refined" some 45% is sold as lI,consumption" sugar !I and about 5% is sold as waShed whites SI, In addition to the . , !I Little better than raw sugar of grey-yellow color. !I Brown sugar, sulphite washed.  -8- production of centrifugal sugar a low grade brown sugar, known as Muscovado J and a low grade cake of sugar, molasses and miscellaneous solids, knovm as Chancaca, are produced in a large number of small establishments and private homes. The production of sugar in Peru during 1949 was as follows: , Tons Metric Raw 96 •.••••••• t •• 280,350 Refined sugar ••••• 100,300 • Consumption sugar • 75,750 Washed whites' ••••• 11,100 Chancaca. • ••••••••• 22,000 Huscovado ••••••••• 150 Source: Private estimate of London Trade. '. 3. Cons~ption of Sugar and By~Products For the past twenty years the trend of domestic consumption of sugar has been Up¥lard. In 1939 about 23% of production was consumed locally but at pres.ent the proportion lies between 35% and 40%. Annual consumption now varies from 140,000 tons to 150,000 tons of sugar in the form consumed. These figures include all the "consumption" sugar, the bulk of the 1i1ashed \Vhites and half the Refined Sugar produced. In addition to sugar from the mj,lls, all the Muscovado and Chancaca is domestically consumed. Because of the scarcity of other foods during and after World War II, the rise in sugar consumption was accelerated in rec~nt years. However, be- cause high world sugar prices would have limited consumption of sugar by the bulk of low income Peruvian consumers l the Goverrment has introduced a sys- tem of quotas compelling each mill to deliver specific quantities of centri- fugal sugar for domestic use. At present, about 13,000 metric tons of this sugar are set aside for consumption in Peru. As a consequence of the retention of such a considerable volume of sugar for domestic use the price of sugar in Peru is rela tively lO'Vf. In spite of this, however, the consumption of refined sugar remains limited to the small high income group and the rise in sugar consumption has been largely in the form of "consumption!! sugar and Chancaca. Some small increase in domestic use of sugar can be attributed to the recent establishment of soft drink and candy industries. The by-products of the sugar industry have been increasing in L~­ portance. Formerly all final molasses was regarded as a waste product and was dumped into irrigation ditches to act as fertilizer. Recently several small distilleries have been established near the sugar oills and by 1946 about 8,000 metric tons of molasses were used for the manufacture of alcohol~ Molasses is also being used in livestock feeds. These uses, however, account for only a small fraction of the total annual production of molasses which is estimated at 125,000 tons. In addition to the utilization of molasses a new use for bagasse has been developed. One of the mills (Paramonga) has  - 9 - established a paper plant which uses bagasse together with imported wood pulp as raw material for the manufacture of kraft paper and paperboard. Owing to the high efficiency with which the mills in Peru are run and the high fiber content of the variety of cane grown, there is a conside):-ab1e sur- plus of bagasse above fuel requirements and further development along the Paramonga lines might be possible. 4. E~ports The exportable surplus of sugar varies from 300,000 tons to 350,000 tons annually and exports of sugar in all forms accounted, on average, for about one-quarter of the total value of all Peruvian exports in postllc'ar years. About one-half of the raw sugar exported goes to Chile for refining, while the refined sugar exported goes to Bolivia and other South American countries, Under the United States Sugar Act of 1948, the marketing of Peruvian sugar in the United states was reduced to 7,700 metric tons •. However, failure of some Far Eastern countries to meet their United states quotas has res~ted, during recent years, in the reallocation of part of these shortfalls to Peru; with the recovery of Far Eastern production Peru's exports to the united States may be reduced to the present quota level. In 1952, when the United states Sugar Act comeS up for reviSion, Peru in common with other Latin American countries, will probably endeavor to obtain increased quotas but with the prospects of Cuban surpluses they are unlikely to obtain material concessions, The United Kingdom, before Vlorld VIaI' II, was a marke'!;, for about one- third of Peruvian raw sugar exports but in 1949, owing to currency difficul. ties, no exports went to the United r:ingdof!l. An arrangement has been com- pleted recently whereby United Kingdom purchases of Peruvian sugar can be made in sterling, and consequent],.y, shipnents to the United Kingdom can be expected to recover; it is unlikely, however, that Peruvian exports to the United Kingdom will in future reaqh prewar levels owing to the planned de ... velopment of CommoroNealth exportable surpluses. Continental Europe took an increased quantity of sugar from Peru in 1949 but little more than the small prewar quantity can be expected to find a market there over the longer term. In view of limitations on production of sugar in Peru and increasing domestic consumption Peruvian sugar exports in all forms are not likely to exceed,630,,000 metric tons, the amount of Peru's basic quota fixed in ATti.cle 19 of the International Sugar Agreement, 1937. Should a nffiV Agreement come into force in the near future· it is unlikely that Peru would seek a larger international quota since she should find it increasingly more difficult to meet the old quota.  - 10 - ESTIMATED SUGAR EXPORTS FROM PERU (thousand metric tons) 1938-39 average 1948 1949 Chile 114 118 131 • Uruguay .. • • ' . . . . . . . . . . . . . . . . . . . 0 • • • • • Oo • • O • • O • • • ~ ••••••• 5 60 28 Bolivia •••••••• c ••••••••••• .~ .18 26 29 other Latin America •••••••••• 5 27 United states c •••• • •••• ~~~ •• • 35 37 30 United Kingdom ~ ............ ... '" Europe • • • • • • Q • • • • • • • • c • • • O~c 100 10 72 .3 40 Japan •• 0 •••••• ••••• ••• 4 •••••• 36 others •••••• '!Q.li., ••• O.O • • • • • • 10 Total . -. 297 .352 285 • • • • •• • • • • • • • • • • • • • ........ ........ 268 .309 2.36 Raw Refined ...................... ~.&~~~.~~~ 29 43 49 Source: u.s. Department of Agriculture Prospects for foreign exchange earnings from sugar are mixed. Dur- ing the early summer the world sugar market was depress~d by the prospect )f a surplus of three-fourths of a million tons of Cuban sugar. The Korean Situation, however, caused a sharp rise in prices. There is no threat at present nor prospect of a world sugar shortage, the rise in prices being en- tirely attributable to a hurried movement of sugar from producing to consum- ing countries, particularly the United States, in the face of the interna- tional situation. If the international situation is not aggravated the accumulation of large stocks of sugar in consuming countries can be expected to depress prices and with the continuing prospects of Cuban sugar surpluses, prices may fall sharply. The current situation may temporarily increase the proportion of Peruvian exports of sugar to dollar markets but in the long run these are not likely to be maintained at the higher levels.  APPENDIX III PERU-TRADE IN HETALS LND ORES Conclusions (a) Peru's mineral output is highly diversified. Over the past ~iO .. decades, lead and zinc and their co-products have assumed increasing ir.1por- tance, while copper, gold, silver and vanadium have declined relatively. (b) Known mineral deposits which have been partially eA'Plored and ... tested afford a physical basis for a substantial increase in the volume of mineral exports. Including the increase in the value of exports resulting from further processing of zinc, it is estimated that the increase in export volume may be 50% or more above the 1948-1949 average of :;;;48 million, equiva- lent during the 1960 l s (at constant prices). (c) The major obstacle to increased mineral exports in recent years has been a lack of confidence in the policies of the Government \iith refer- ence to taxation and exchange policies, whi~h limited convertibility of earnings into dollars. Two projects have been delayed (one abandoned) as a result of a failure by the investors to secure a satisfactory agree- ment. (d) The increased production should be marketable largely to the U.S.A., except in periods of severe depression. - l l ...  - 12 - 1. ~ackground Peruls mineral production has undergone a major transformation over the past thirty years. In the tv/enties, the major emphasis in production was on copper, (carrying high gold and silver values as well) and vanadium .. There was also a limited production of lead and zinc. The two dominant firms were Cerro de Pasco Co. and the Vanadium Corporation of Americar Because the copper ores were so rich in precious metals, mining methods were relatively wasteful and little or no attempt was made to recover such smelter by-products as antimony or arsenic. Lead and zinc production 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 element which was just beginning to find new uses. During the depression of the thirties,. the sharp fall in silver and " copper prices caused operators to seek profitable means of exploiting Peruts lead and zinc ores and encouraged Cerro de Pasco to make efforts to recover more by-products in smelting.. The leaner vanadium ores 'Nere as yet consider- ed lli~profitable. War demands for lead and zinc encouraged lead mines to install flotation units to recover zinc hitherto discarded as v.raste and encouraged mining of ores more for their base rather than precious metal content o· As a result lead and zinc production, particularly zinc, rose relative to silver. A small plant was erected to treat arsenic accumulations and re- covery of bismuth and antimony was increased. Under war-time pressure a plant to treat low-grade vanadium ores was 8.150 financed by the U.S. Govern- ment,which was later sold to Vanadium Corporation, the bulk of whose current output is from low-grade ores, since the old rich mine is virtually exhausted. These trends have continued in the postvTar period as indicated by the fact that lead and zL~c output reached new highs in 1949, whUe output of copper, gold and silver is below war-time peaks. InCidentally, the war- time copper output peak (1940) was below the 1928-29 level in decided contrast to that of lead and zinc. The attached Table I contains statistics of mineral output for select~ ed recent years, illustrating the trends outlined above. 2. Production Prospects . . The trend toward 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 A.S. &R. project at Chilete. It is also probable that the electrolytic zinc plants of Cerro de Pasco, when  - 13 - 1/ completed,- may make increased production of zinc concentrate~ at Cerro and perhape other mines more readily marketable at better prices.. At present, transport costs and high iron content render zinc concentrate output at some mines relatively unprofitable except in periods of boom prices .. In copper, the Northern Peru Mining Co. (an A.S. & R.. subsidiary) is engaged in investigating the Toquepala deposit (in southeznPeru) with a view to erecting a plant to treat lQ,OOO tons of ore per day. If investi- . gations indicate this project feasible, the copper output of Peru could be more than doubled within five 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 able to !'legotiate with the Peruvian Government, for transfer of earnings outside Peru. The experience of some £irms has caused at least one large mining company to abEtndon a project in recent years, while another has delayed making further investments in the hope of securing better terms in the future. 3. Hineral Exports of Peru .. Past and Presen! l'lhile Peru's economy is not so heavily dependent on a single com ... modity as in Bolivia, Chile or Cuba, mineral exports constitute a sub- stantial proportion of Peru's trade (2.5% in 1948 and 26% in 1949). y It is estimated that the value of mineral exports (incluqing all gold and silver) were ~;;46 millions in 1948 and ~~1.50 millions in 1949. For 1950, it is likely that the volume and value of exports will be little changed from 1949. At prices prevailing on September 1.5, 1950, the unit values of minerals exports were almost 15% abovel949 (in dollar terms), indicating that 1951 may show some increase if volume and prices are main- tained at current levels. Another factor v,hieh will raise the value of Peruvian metal exports in future years is the increase in value of zinc !I The capacity of Cerrols existing pilot plant at Oroya is about 100 tons per month. This plant1s capacity is being expanded to about 1,000 tons per month, with construction well under way. Cerro de Pasco is negotiat- ing a loan from EXport-Import Bank, which if successful would finance a new plant with an additional capacity of about 3,000 tons per month. Annual output of electrol)~ic zinc in 19~4 and thereafter may thus total 45-50,000 tons per year. ~ The ratios are som~fhat distorted by the fact that as smeltinc and refin- ing of metals increase within peru, some of gold and silver formerly classified as metal exports because they were contained in blister copper (e. g. 1948) Viere classified as monetary or precious metals in 1949 because the gold ana silver were separately extracted in the copper refinery. If total exports of gold and silver in all forms were included in mineral expor.ts in both years, the percentages would be about 28% and 32% in 1948 and 1949 respectively,.  -14- exports, because of the expansion of zinc smelting capacity from the present pilot plant stage of about 1,000 tons per year to an ultimate output of perhaps 40-50,000 tons per year. If the zinc exports in 1949 had been in refined form rather than concentrates, the same quantity of zinc ezported in refined form would have had a value of ,,:15-16 millions as against an estimated value of',S millions. :Jinee the expansion of zinc smelting facilities and probable expansion of lead, zinc and copper mining 1:,rill involve appreciable investment, it should also be borne in nind that re!1it· tances on account of profits and amortization of capital will likely increase concurrently with exports. In fact, it is the lack of firm assurances on this score which may 0elay expansion. Over the next decade or two, it is likely that the volume of Peru's mineral exports may increase 50% or more, resulting in metallic exports of ~;75 millions or more annually, provided expansion plans now projected are actually carried out. Virtually all the copper and lead concentrates and much of the refined copper and lead are sold in the U.S. market, as are II all the vanadium ores. The zinc concentrates are marketed in a variety of countries including Canada, U.S.A .. , Belgium and other continental countries. Small marketing of refined copper and lead, and eventually zinc, is made in Latin America and in l{estern r~urone. Consumntion in Peru is s11all and accounts for less than 10;6 of production in ~ost years. It appears quite unlikely that Peru will find it necessary to market more than a small part of its mineral exports outside the "iestern Hemisphere. The experience of the thirties with U.S. self-sufficiency at low J.evels of consumption is unlikely to recur, except for an occasional period of sharp business depression in the U.S.A. Iven in'such a case, Peru would be less vulnerable than Chile, for example, because its dependence on mineral exports is relatively smaller and more diversified. Table 1 PERU--UINIRAL OUTPUT IN SELECTED YEARS 1936-39 Tar pe8.k Commodity Uni t average quanti ty (year) 1947 1948 1949 ------~--------~--;------ Copper 35.6 !.t4.0 (1940) 22.4 18.1 28.0 Lead II 44.2 53.7 (1945) 45.8 48.5 65.4 Zinc " 17 .O~/ 61.2 (1945) 58.2 58.8 71.5 Antimony MT 1,000 2,472 (1943) 1,283 1,636 750 Arsenic II 6,900 (1944) 608 1,011 500 Bismuth 11 250a/ 483 (1943) 237 253 216 Vanadium " 640 1,21h (1940) 437 511 456 Gold fOOO dz 222.6 285.2 (1941) 116.0 111.2 112.3 Silver 11 19,181 19,916 (1940) 10,783 9,288 10,609 ~/ Estimated. , 1  APPENDIX r:l PERU'vIAN PE'IROLEUi-f DEVBLOPHENT Conclusions (a) Peruls crude oil output increased steadily until 1936, falling off thereafter. Its role in world petroleun trade has shrunk even more sharply, because rapidly rising internal consumption has greatly reduced exportable surpluses. (b) Oil production has been limited to the northern coastal area (except for one small operation east of the Audes). The remainder of the country has been designated as a governmental oil reserve on which limited concessions may be granted with legislative approval. Proposed concessions contracts have in the past failed of such ratification, ten'ing to restrict oil output. (c) Internal II ice controls which have not been modified to reflect increases in world prices or the steady devaluation of Peruvian currency have greatly reduced profit margins on internal sales. Because proven reserves are limited and new, concessions were not obtainable, the combined effect of increased domestic demand and rigid internal price control has been to reduce earnings and stifle development. (d) Chile is the major market (70% of the total) for Peru's exports of refined products.. In view of the discovery of oil :in Southern Chile and the known aspirations of Chile for a refinery to prooess this crude, Peru's largest and most favorable mark~t may be lost within the next decade. While  - 16 - Peru's exportable surplus can undoubtedly be marketed in other nearby areas, such a shift would involve greater freight absorption and lower net realiza-:- tions for Peruvian exports, at any given world price level. (e) In view of the foregoing, it is unlikely that Peru's petroleum exports will expand over the next decade or two, unless very favorable terms or new concessions are offered by the Peruvian Government and such conces.,., sions are developed on a large scale and promptly. The recent experience of petroleum enterprises in Peru is not likely to be viewed favo:rabJy by new firms seeking sources of foreign oil output.  ·1· • - 17- 1. Background Production Peru has had a long history of petroleum production. Prod1:,ctionbe- gan in 1896, eleven years before it commenced in Argentina, the <next South Ji.merican country to begin production on a commercial scale. Not until 1924 did it relinquish its position as the leading South American country to be- gin production on a commercial scale. Not until 1924 did it relinquish its position as the leading South American producer to Venezuela. In the next few years it was outstripped by Colombia, Argentina and Trinidad, so that Peru's share of South American output fell as follows: < t 1920 1925 ·, ........... 40% ·... , ......... 23% 1930 ·.............. 7% 8% 1935 1940 , .......... ..• ,•••••••••••• 5% 1945 1949 · ............ , ............ 3 .. 4% 2.5% Table 1 attached traces the changes in petrole~~ production in re- cent years. Peak output was attained in 1936 (17.6 million barrels) and fell off thereafter. In 191~9 production of 14.8 million barrels was, how- ever, the highest since 1938. Trade Exports have fallen off more sharply becaUSe rising internal con- sumption has limited the quantities available for export. In 1930, domes- tic consumption amounted to 2.2 million barrels) leaving an export surplus of over 10 million barrels, largely crude oil. By 19h6 when production was little different from 19.30 levels, exports had fallen to 8.3 million barrels. Despite an increase of 2.3 million barrels in production beureen 1946 and 1949, exports increased only 0.2 million barrels. Between 1930 and 1949, in- ternal consumption had risen from 2.2 million barrels to over 7 million bar- rels of petroleum products. It should be noted that Peru customarily imports about 100,000 barrels of special products, including lubricants. Detailed data on foreign trade in petroleum in recent years are con~ tained in Tables 2 and 3. Reserves Peru is believed to possess substantial reserves, particularly east of the Andes. Proven reserves at the end of 1948 were estimated at 160 million  - 18- barrelS¥' but these include no allowance for potential reserves east of the Andes. One partic1;llar1y promising area is the IJontana region, which an oil official estimated would require t250 million to develop properly and would require at least ten years. 2/ Another favorable area, the Sechura desert, was the subject of a proposed concession to International:?etroleum Company which was never approved by the Peruvian legis1a.ture. Government Controls Exploration 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, which accounted for less than 1% of the output in 19h9). The re .... mainder of the country has been designated a goyernment oil reserve on vrh;ch limited concessions may be granted with legislative approval" which latter has been unobtainable to date. Not only has the area of 9rivate oil search been delimited but price controls have apparently made domestic sales ex- tremely unprofitable.3/ Since an increasing proportion of output has been sold internally 4/, tne impact on gross and net reVenues of International Petroleum Company has been very sharp_ The Lobitos Oil Company, which until mid";'1949 was free to export its total output, has since been required to share the domestic market with International, thus slightly lessening the latter's burden. The small Gauzo Azul Company has reported a substantial loss in 1949 due to the low selling prices fi::.:ed by the Peruvian Governn:ent. 2. Future Prospects Concessio:;.s The basic question with reference to the outlook for Peru's trade in petroleum and products is the problem of removing the burdens hampering fur- ther exploration and development of Peru's untapped oil resources. It is in- conceivable that Peru's foreign trade in petroleum will not deteriorate over the next five to twenty years, unless positive steps are taken by the Govern- ment. It is unlikely that the Peruvian Government could execute a ten-year program calling for an annual expenditure of $20-$30 million per year (per- haps half in foreign exchange) which appears necessary for a large-scale y :everett De Golyer, -.Jell-known consulting engineer" in OU & Gas Journal, December 30, 1948. -... - ?/ 119rld Oil, July 1950, p, l42. 2/ Internal prices have not been adjusted upward to retlect increases in world p;r.ices (in dollars) or :thePeruviqn 9u,r~~ncy devaluations for nany years. 4/ I.P.C. estimates that 58% of its output was used for domestic requirements - in 1949 as compared with .31% in 1943, Yrhen production was at the same level.  - 19 - exploration and development of favorable areas for petroleum. Furthermore, it is not apparent what sources could be tapped by Peru for such large foreign exchange outlays, Yihieh mayor may not prove productive. . (In this connection, it should be noted that very' large sums were expended in Ecuador by private concerns in recent years without success. In these cases, the' project 'J'las deemed feasible because the participants were able to finance th:1.s venture from their earnings in other areas of the world, a source unavailable to most governments. ) It would appear that the Peruvian Government will find it necessary to make concessions available to private investors on relatively favorable terms, if a decline in Peru's net exports of petroleum is to be avoided. It is quite probable that concessions will be limited to areas, the prospects and size of which will about suffice to maintain exports at recent :evels. The prevailing sentiment in Peru appears to be strongly opposed to a p~ivate , oil boom and action probably will be taken only to the eJ:tent deer.:.ed neces- sary to prevent a deterioration in Peru rs petroleum exports. The aSl)irations for a nationally controlled petroleum industry are still strong and vrill not likely be relinquished. Price Problems The Peruvian price control regulations have had a mixed effect on exploitation. In so far as production could be increased relative to inter- nal consumption, there was a strong incentive for International Petroleum Company to do so, since net price realizations on exports appear to have been 75%-300% higher than on domestic sales and reduced net earnings by approxi- mately 40¢ per barrel. 1/ But because reserves are limited and new concessions have not be~n available; the combined effect of increased domestic demand and internal price control has been to reduce earnings and stifle development. This factor may have to be overcome by government guarantees if Peru's oil resources are to be developed by private firms. Foreign Harkets i It should be recognized too that the rapid strides in !:Iiddle East oil development may narrow the European market for Peruvian crude, while de- velopments in Chile also promise to raise new problems. In recent years, Chile has been a major market for Peruvian refined exports, accounting for about 70% of the total. 2/ Chile!s dollar shortages, its growing crude oil output and its aspirations for a domestic refinery appear to dim the pros- pects for Peru's exports a f refined products. 1Jhile the impact on volume is unlikely to be great in the next few years until a new refinery is erected in Chile and crude production is expanded, the long-term future of the Chilean 'I. ~ Calculated from data supplied by International Petroleum Company. ~/ See Table 4.  - 20- market for Peruvian refined products exports is very doubtful. Since the volume of Peruvian exports is small, their sale is relatively assured in other parts of Latin America, but sales in other markets will probabJ_y re- quire greater freight absorption and lower net realizations at any given world price level. This factor would tend to reduce the incen-tJives for large-scale development of Peruvian oil by major oil companies. I  - 21 - Table 1 PERU--PETROLEUH PRODUCTION (In 1000 barrels) Years and ,= -= yearly averages Quanti~~ 1896-1899 • ............... ~ 70 • e, • • • • • • • • • • • • • • • • • • • • • • • • • • • • III." ............. ~ 1900-1909 ••••• ~~.~~~.~ •••••••••••••••••••••••••• 542 ~ •••••••••• 6 •••••• 1910-1919 .•••••••• ,•. _ ••• , •• e,_,_ •••••••••••••••••••• "........... e,.' •• 2,129 t- • • • . _ • • 1920-1929 '.~•• ~'."."••••••• ' ••• " ••••• ' •• " ' •• '6" •• •• ' •• ' ••• 8,146 '.~ .••....••..•.••..• ..•.•.••..•......•...••...........•... 14,347 1930-1939 1940-1949 ........................ ...................... ... ......... . ~ , - 13,h57 ~ 1~40 • • • 0,$ • " e.* •••••. ' ••••••. f • • ,III ' . ,• • • . • • • 0 . . . . . . . . . . *' ...........' .... . 12,126 1941" • •• il'''' •••••••••••• O' • • • • t.,e • • • • • • • • • (>. " o •• . ,• • • • "0 . . . . . . . . . . ,-, .. 11,.935 1942 .o •• ! •••••••••••••••••••••••••••• o •••••••••••••••••••• '0. 13,629 1943 •••• ••••• •• • • • • • • • • • • • • • • o • • • • • ' •• • • • • • • • • • • • • • • • • ~ ~~ ~ ~.~ 14,654 1944 • • • • • • • • • • • • • O • • • • • • • • • • • • • O • • • • • • • • • • • • • • • • • • • • • • • 4 .te ~ ~ 14,389 • 1945 1946 •••••• o ••••••••••• •••••••••••••••••••••••••••••••••••••• ~ 13,144 12:1468 1941 ••••• •••••• ••••••••••••••••••••••••••••••••••• ••• ~.O~.~! ~ 12,164 1948 • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • o • • • • • • • • • o • • • • • • • • • • • • ~ ~~ ~ 14,069 1949 •• •• ~ •• •••••••••••••••••••••••••• o.o •••••••• ••• ~.~~.~.~, ~ 14,190 Table 2 PERU--PETROLEU11 'l'RAn~/ (In '000 barrels) -- ---- Exports as - Exports %of Yea:r crude refined total Production , production 1.945 • •••• 213 8,941 9,214 13,144 67.0 1946 1947 ••••• ·.... 1,968 1,648 6,596 5,061 8,244 7,029 12,468 12,,764 66.1 55.0 1948 ·.... 2,232 1949 • •••• 2,356 5,465 6,098 7,697 8,454 14,069 14,,790 54.7 57.2 Imports of petroleum products are negligible; available data for 1945 and 1946 show imports of 15,000 and 147,000 barrels respectively.  - 22 - Table 3 PERU--VALUE OF PETROU:Ui1 EXPORTS COIIPARED WITH VALUE OF TOTAL EXPORTS (In thousands of sales) , Pet.roleum- - as %of Year Petroleum ,exports J Total exports total 1000 soles!9 '000 US~)!7 I , 1000 ·s·oles 1945 ·...... 84,307 12,970 674,530 12.5% 1946 ·...... 90,933 13,990 983,583· 9.2% 1947 • ••••• 114,692 17,645 1,002,943 11.4% 1948 •••••• 188,133 28,944 1,055,8;33 17.8% 1949 •••••• 316,532 23,206 2,107,519 15.0% ~ 1945-1948 inclusive, US$ 1 = 6.50 a61e6. l194~, US$ 1 =13 .. 64 soles • •  • . Table 4 PEllU--EXPORTS OF PErRCLElirM BY COUNTRY OF DESTINATION (In '000 barrels) ~h 1"91.1-2 1<148 1242 Country Cru®' ~t],.ned ~gj,a:i. C:(].ldo Refined Total Crude Refined Total Crude Refined Total Canada, ............ 201 201 El Salvador ........ 167 167 148 148 103 103 51 51 Ot.her Central America.· ........ 198 198 .... 486 486 .... 138 138 327 327 . Argentina· . .... •••. 368 368 342 342 928 928 980 980 Bo11 via ' •.•••••••• 252 252 192 192 215 215 270 270 Chile .. ......... "" -- 3,567 3,567 3,278 3.278 3,700 3,700 4.307 4,,)07 ' Colombia ........ 484 484 530 530 952 952 744 744 Urtlg\lsy .....' ..."•.•. 673 673 957 957 232 232 227 227 Other South ("'\ America· .•.•••• ' ••• 130 130 64 64 63 63 8) 8) N 1 Uni ted Kingdo.m ••• 607 607 669 669 1,072 - 1.072 1,149 - 1.149 Australia New Zealand .... ... .. ... ' ' 289 981 289 981 97 97 Bunkers .••••••••• 327 327 266 266 294 294 '0)16 316 Total • ... . . . .. . . .. 1,648 6,596 8 244 J",968 L 5.&91 2.Jl£2 .z ,232 5,465 '1,697 2,,'56 6.098 . 8 .. 4t:i4  - 24 - Table 5 BALANCE SHEET AND RECONCILIATION OF PF..RUVIAN PETROLEUJ:l AND HATURAL GASOLINE output, Consumption and Exports (In 1000 barrels) 1949 crude Oil Production •••• ~ ••• ~ ••••••••••••••••••••• 14,790.1 14,069.1 Runs to stills ••••••••••••• 0 •••••••••••• 12,285.8 J:~901.9 Balance for 'export '. ~ ...' •• .; ••• ~ •••••••• 2,S04.3 ,2,167.2 Exports •• 0 • 0 ............ i • •~ ••• ~ ••.' ••.• , •••• 2,355.7 2,2)1.9 DifferenceY' •••••••••••••••••••••••••• t 148.6 - 64.7 Refined Products Crude runs to stills •••••••••••••••••••• 12,285.8 11,901.9 Refined products output £I ............ . 12,247.0 11,852 .. 0 Natural gasoline output ••••••••••••••••• l:.,093 .. 8 1,088.6 1),340.8 12,940.6 Demand Domestic marketings ••••••••••••••••••••• 7,393.8 6,979.) Refined products exports •••••••••••••••• 6,098 .. 3 5,465~1 Total disposals ........•......•...... , , 13,492.1 12,444.4 Difference ~I ..........•.•......•. , .. - 15:1,.3 t 496.2 ~I No account is taken of changes in stocks • .. bl Difference between crude runs and output of refined is measure of losses in processing.  - 2$ - Table 6 PERUVIAN PRODUCTION OF CRUDE AND REFINED PETROLEm.r (In '000 barrels) __--------------~--~--~~--~.1~94~9______~,.1948~ Crude Oil ........•......•..•.••• ....•.•... 14,,790.1 -0---.._-- lih,069.l .......-- ~ ~ Talara and Negri tos (IPC) • • ••• ... .. • • • • • • • . 11,913.0 1i,362S Lobitos - El Alto (Lobitos) ••••••••••••• 2,615.7 2,473,,0 . E.PoF. (state Petroleum erg .. ~." r .. ,.. .... 121.,2 112,,6 Agua Caliente (Ganso Azul) 140~2 0 • • • • • • • • • • • ." . 121.0 Natural Gasoline ••••••••••••• 0 ••••••••••••• 1,038.6 I.P.C • •••••••••••••••••••••••••••••••••• 976.6 971.a Lobitos ••••••••••••• a ••••••••••••••••••• 117.2 116.7 Refined Products Gasoline ••••••••••••••••••••••••••• - 11,852 Aviation • • • • • • 0 • • • • • 0 • • • • • • • • • • • • • • • • 144 161 Motor 3,806 3,762 Kerosene 1,084 897 Diesel oil • • • • • • • • • • • • • • • • • • • • • • • O' • • • ~. 1,380 2,016 Fuel oil • • • • ., -0 . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,623 4,769 Lubricating oil •••••••••••••••••••••• 0 • • • 68 70 Asphalt •••••••••••••••••••••••••••••.••• 84 61 still gas ••••••••••••••••• 0 • • • • • • • • • • • • • 58 61 Other ••••••• ., • 0 • • • • • • 0 • • • • • • • ,. ., ~ • • • 6 • • ,0 • 55 •  APPENDIX V EXTERlfAL DEBT HISTORY During the ti'lenties, Peru issued dollar bonds in the Nev<r York marl<et and consistently met interest and amortization payments. In 1931 Peru de- faulted on its external obliga tiona. Except for the payments on the Guano Sterling Loan, made because of its "special security and status," practi- cally none were made on the rest of the external debts from that tiJlle until February 1947 when Peru put into operation a debt adjustment plan. This plan called for coupons starting at 1% for 1947~1948, 1-112% for 1949-1950, 2% for 1950-1952, 2-1/2% in 1953 and thereafter; a Sinking fund of 1/2;s per annum was to be used to acquire bonds for redemption in the market; unpaid interest to December 31, 1947~ amounting to ~j95 million, was cancelled without compensa- tion. The Foreign Bondholders Protective Council Inc. announced that it would not recommend acceptance of the plan because, (1) the final interest rate of 2-1/2% vras below standard and therefore the service obligation assumed was proportionately low. The money required to handle this p::'ogram for the year 1947 was estimated to be only 1% of the current Peruvian national budget and only about 1% of the value of Peruvian world exports, (2) the cancella- tion of all interest arrears was a departure from the principle of reasonab~ debt adjustment, (3) the legislation was u.11satisfactory because of the loopholes it contained and the contract changes made 'without the bondholders' consent. The sterling readjustment plan was substantially the Game as the dol- lar readjustment plan discussed above. The Council of Foreign Bond~101ders (British) made it clear to the Peruvian Government that they shared the views of the Foreign Bondholders Protective Council Inc. outlined above. British Government authorities refused the application for permisSion to offer this readjustment plan, presumably on the grounds that acceptance of such an offer, from a foreign exchange point of view, would be contrary to the national in- terest. In the 1941 debt adjustment plan sterling obligations could be ex- changed for dollar bonds on the basis of tJ. sterling equalling ;:~4.0l, On January 3, 1950 this provision was changed to allow the exchange only at the new devalued rate tJ. principal amount of old sterling bonds equalling :!;·,2.80. A considerable t~~e after the dollar debt adjustment plan was offered, • less than 20% of the bonds had been assented to the program. There has, how- ever, recently been a substantial increase in the number of bonds assented to the plan and, by September 1, 1950, :J~7.4 million or 62% of the total $76.5 million of the dollar bonds outstanding at the time the plan was offered in 1941 had been assented to this program. Mr. James Lynch (Economic Department) has been informed by Hr. Kenneth i'~. Spang, Vice-President of the Foreign Bondholders Pro~ective Councll, Inc. that the Peruvian Govermlent has .. 26 -  - 27 - been having bonds purchased on its behalf in the market and assenting them to the program. It is not known how much of the increase (from 20% to 62%) in the amount of bonds assented is due to this action.. It was stated by the Central Hanover Bank and Trust Company, trustees of the new bonds, that the Peruvian Government has not presented bonds in lieu of cash for the sinking fund, but has in fact paid cash to the Bank who in turn purchases the new assented bonds from brokers in accordance with the Sinking fund pro- V2S10ns. It is estimated that this cash, amounting to $1.3 million, has reduced par amount of bonds outstanding by $8.h million" indicating an average purchase price of around \~15o for the bonds acquired for the sinking fund~ Since this accounts for only 20% of the $41 million par value which has been assented to December 31, 1949 from 1947, there was left about $33 million unexplained assents to the program. The question was raised with officials of Central Hanover Bank and Trust Company as to whether the Peruvian Government had accounted tor any major portion of this and they stated that there is no indication from the records that such is the case and there was assenting to the program by many people, although one of the largest assenter::> was the Carl Marks & Co., Inc. Marks had explained to us that their assenting to the program was based on purchase orders placed with them by the Peruvian Government for nEWv bonds and in order for him to complete this transaction, had to assent old bonds, receive the new bonds and deliver them to the Peru.vian Government. Yfhen the full 2...1/2% interest rate becomes effective in 19.53 the required outlay under the prosent settlement would become $2.6 million annually (interest '.a.8 million and sinking fund $0.8 million, with the interest portion diminishing as the bonds are retired and the sinking fund portion increasing correspondingly). It "muld pro'bably involVB only relatively small additional outlays to produce a settlement which would be acceptable to the bondholders! councils, but it is very difficult to calculate exactly what these amounts might be in view of the many different forms which a revised settlement might take.. There would be the question of whether the increased payment should be made retroactive to 194.5, the date of the originalag~eeocntwith the bondholders' councils; the question of what the new interest rate and siilking fund schedules should be; the question of the treatment of pre-19L~5 defaulted interest payments; etc •. One way to illustrate the possible additional cost would be to assume that the present schedules would simply remain in effect through 19.53 but that in 1954 and thereafter the interest rate would be raised to 3% and the sink- ing fund to 1%" with ';10 million of n~v bonds being issued in lieu of accumu- lated interest arrears amounting to same $79 million. Under such a settle- ment total service in 1954 and subsequent years would call for an expenditure of $3.4 million a year (interest $2.3 million and sinking fund ~l.l million • in 19.54" with the interest portion diminishing as the bonds are retired and the sinking fund portion increasing correspondingly). This would involve  - 28 - an outlay of about $800 thousand per annum more than under the present arrangement. y. , • 11 In calculating these figures it is assumed that under either plan the service requirements on the sterling deb;;' would be calculated at the ex- change rate of $2.80 per pound sterling. However, it is possible that .. the sterling bondholders would hold out for a plan under which they would retain the privilege (which they had before January 1950) of converting their sterling bonds into dollar bonds at the rate of ~4.oo per pound sterling instead of the current rate of $2.80.