Peru - Current economic position and prospects

RETURN TO R E S T R I C T E D REPORTS DESK FILE~ WITHIN C py R e p o r t N o. W.H. 42-a ONE WEEK This document was prepared for internal use in the Bank. In making it available to others, the Bank assumes no responsibility to them for the accuracy or completeness of the information contained herein. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT THE CURRENT ECONOMIC POSITION AND PROSPECTS OF PERU July 8, 1955 Department of Operations Western Hemisphere  Currency: No official parity; from 1950 to March 1953 the rate fluctuated between 15 and 16 soles to the U. S. dollar; from April 1953 to January 1954 it went up from 16 to 22, then went down to 18 at the end of February and has remained stable at 19 since September. In this report conversions have been made on the basis of the average certificate rate for the year: 1 U.S. $ 19.40 soles 1 sol (s/O) 5 cents approx. 1 million soles U.S. $49,700  TABLE OF CONTENTS PAGE BASIC DATA GENERAL MAP SUMMl4ARY AND CONCLUSIONS i - iii DOMlESTIC POSITION AND PROSPECTS 1 I. Production and Income 1 II. Domestic Finance 9 A. General 9 B. Fiscal Policy 9 C. Monetary Policy - Prices 14 D. Overall Financial Prospects 15 E. Administration and Budgetary Procedures 16 EXTEENAiL POSITION AND PROSPECTS 18 I. General 18 II. Balance of Payments 18 iII. The Exchange Rate 19 IV. Foreign Exchange Reserves 19 V. Prospects 20 CREDITWORTH INESS 22 STATISTICAL APPENDIX Table 1. External Public Debt 2. Forecast Service on External Public Debt 3. Government Receipts and Expenditures 4. Consolidated Statement of Government's Cash Position 5. Investment of the Central Government 6. Central Bank Credit Outstanding 7. Changes in Central Bank Credit 8. Balance of Payments 9. Exports by Main Commodities and Areas - Value 10. Exports by MYain Commodities and Areas - Percentage 11. Imports by Category and Area of Origin - Value 12. Imports by Category and Area of Origin - Percentage 13. Foreign Exchange Reserves GRAPHS 19 19  BASIO DATA Area 482,300 square miles Population (1954) 9.3 million National Income (1954) 17.2 billion soles (At factor cost) Pate of Increase (1942-1952) In real income 4 1/2% In per capita real income 2 1/ 2 Trade (1954) In U.S. $ million Exports 247.6 Imports 249.7 Balance - 2.1 Balance of Pa ments (Surplus 4 Deficit _) / 7.7 Foreign Exchange Reserves Central Bank As of Iiay 31, 1955 In U.S. $ million 27.8 As % of 1954 imports 1l.1% Principal Exports: 1954 In U.S. $ million Lo of total Cotton 64.9 26.2 Sugar 33.0 13.3 Rice 3.6 1.4 Wool 9.8 4.0 Minerals 86.1 34.7 Petroleum 17.1 6.9 Others 33-1 13.4 Total 247.6 100.0 Composition of Imports (1954) In U.S. $ million % of total Consumer goods 98.6 39-6 Foodstuffs 41.7 16.7 Textiles 21.1 8.6 Manufactures 35.7 14.3 Paw Materials 23-0 Fuel and Lubricants 6 3 Capital Goods 8 934.4 Total 249.7 100.0 Trade by Area % Exnorts Imports U.S. and Canada 35 55,1 Europe 34 32.4 Latin America 21 9.1 Rest of the world 10 3.4  SUIThJARY AND CONCLUSION'lS 1. The economic difficulties which beset Peru in 1953 have not affected the internal growth of the country and in 195L, both its internal and external position imDroved markedly. Output reached record levels in most sectors, a result of past investments and of a sustained rate of economic activity. Agricultural nroduction con- tinued to increase and both the cotton and the sugar crop hit record levels. Mining activity was mca.ed by the progress made in the expansion of refining facilities, and by the decision to oroceed with the Toquepala copper project in Southern Peru, involving an investment of U.S. 1W200 million. Oil exploration continued unabated, but after the somewhat disappointing results obtained in the Sechura desert, much of the interest shifted to the Amazonian basin. After a mild recession in mid-1905 due to a liquidation of inventories and a restriction of credit, business recovered quickly and there are many indications of renewed activity. Advances have been made in most sectors and 1951t has been a year of rrogress with stability. 2. This stability had been endangered in 1953 when imnorts rose rapidly under the impact of a high rate of domestic investment, a r.l-xed credit policy and a boom of export earnings. Xjihen the exchange rate began to totter the Government interpreted th,, situation correctly as one of incioient inflation wqhich had lifted import demand to excessive levels. Faithful to their nolicy of free trade and free exchange the Peruvian authorities chose to remedy the situation throuqh the appropriate monetary and fiscal policies instead of having recourse to direct measures of control. This attitude iras in great part respon- sible for restoring confidence and eliminating exchange speculation; the exchange rate which had fluctuated widely in 1953 and early in 195h has remained stable since then at 19 soles per dollar. The two m.ain features of the Government policy were a readjustment of public finances which had been running growing deficits and a tightening of the credit policy 6f, the ba"king system. 3. Government expenditures had increased ranidly from 1951 to 1